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CFP General Principles > Behavioral Finance > Flashcards

Behavioral Finance Flashcards

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1
Q

What is representativeness?

A

The tendency, when considering choices and making a decision, to recall past experiences similar tot he present decision-making situation, and assuming that the one is like the other

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2
Q

How to you show active listening?

A

Paraphrasing the clients statements. “What I heard was…”

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3
Q

What is affinity bias?

A

This refers to the tendency to make decisions based on how individuals believe the outcomes will represent their interests and values

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4
Q

What is anchoring?

A

This involves individuals making irrational decisions based on information that should have no influence on the decision at hand

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5
Q

What is a persons attitude?

A

It reflects a persons opinions, values, and their wants

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6
Q

How does an auditory learner, best retain knowledge?

A

By hearing or speaking

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7
Q

What is behavioral finance?

A

A field of study that relates behavioral and cognitive psychology to financial planning and economics in an attempt to understand why people act irrationally during the financial decision-making process

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8
Q

What do a persons beliefs represent?

A

It is a type of attitude because it reveals the understanding of an aspect of a persons life

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9
Q

What categorizes body language?

A

Involves facial expressions, eye contact, gestures, and body posture

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10
Q

What is the classic economics approach to planning?

A

Clients choose among alternatives based on objectively defined cost benefit and risk trade-offs

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11
Q

What kind of questions limit clients to “yes” or “no” answers?

A

Closed-ended

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12
Q

What is the cognitive behavioral approach?

A

Planners attempt to substitute negative beliefs with positive attitudes

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13
Q

What is cognitive dissonance?

A

This occurs when newly acquired information conflicts with pre-existing understanding, often resulting in mental discomfort

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14
Q

What are cognitive errors?

A

This occurs when decisions are made that are based on “well-known” facts that may or may not be correct

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15
Q

What is confirmation bias?

A

This occurs when individuals look for new information or distort new information to support an existing view

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16
Q

What is conservatism bias?

A

This occurs when individuals initially form a rational view, but then fail to change that view as new information becomes available

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17
Q

What is a client’s context?

A

Past history or any condition that make up a client’s profile

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18
Q

What is an economic and resource approach to planning?

A

The planner is expected to be the agent of change

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19
Q

What is emotional bias?

A

This occurs when decisions are made based on the feelings of an individual

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20
Q

What is emotional intelligence?

A

This is the ability of a planner to recognize emotional responses in their clients and themselves and respond with the socially appropriate emotional response

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21
Q

What is endowment bias?

A

This occurs when an asset is felt to be more valuable than what it is, simply because it is already owned

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22
Q

What is financial coaching?

A

This service helps clients change poor financial behavior through education and guidance

23
Q

What is framing bias?

A

This asserts that that people, given a frame of reference, will use that frame to make decisions.

24
Q

What is herding?

A

When decisions are made because “everyone else is doing it” and because it feels comfortable - potentially contrary to the information available.

25
Q

What is hindsight bias?

A

Selective memory of past events, actions, or what was known in the past

26
Q

What is the illusion of control bias?

A

This exists when clients believe that they can control something that they cannot (gambling, market returns, etc)

27
Q

What is interpersonal communication?

A

This is one-on-one communication

28
Q

What is judgement?

A

This involves people making conclusions about what they have perceived

29
Q

What is kinesthetic learning?

A

This type of learning uses a hands-on approach

30
Q

What is a leading response?

A

This type of response to a client’s question, will guide a client toward a more detailed and specific answer

31
Q

What is loss aversion theory?

A

This is weighing the fear of losses more than valuing the possibility of gains

32
Q

What is mirroring?

A

This is the imitation of a clients gestures to improve rapport

33
Q

What is money illusion?

A

This is the misunderstanding people have in relating nominal rates and prices with real, inflation-adjusted, rates of return. A dollar today is NOT a dollar tomorrow.

34
Q

What is a money jar mentality or mental accounting?

A

This involves the tendency of individuals to mentally put their money into separate accounts based on the purpose of these accounts.

35
Q

What type of questions requires clients to answer in their own words?

A

Open-ended

36
Q

What is outcome bias?

A

The tendency for individuals to take a course of action based on the outcome of previous events

37
Q

What is overconfidence?

A

This is the tendency for clients to believe that they can control the outcome of events simply based on acquiring more knowledge. These people generally consider their abilities to be better than they really are.

38
Q

What is perception?

A

This is an individuals awareness of things, people, events, or ideas.

39
Q

What is physical mirroring?

A

This is where the planner copies the client’s body language

40
Q

What is the pitch of someone’s voice?

A

This means the highness or lowness of someone’s voice

Low usually means confident and high usually means uncertain

41
Q

What are psychological profiles?

A

This is the planner’s ability to understand their client’s perception and judgement of recommendations

42
Q

What is recency bias?

A

This is the tendency to take new information, which is more recent, and consider it more important and valuable than less current information.

43
Q

What is regret aversion bias?

A

This occurs when individuals do nothing out of excess fear that their decisions or actions could be wrong

44
Q

What is risk capacity?

A

This is the degree to which a client’s financial resources can cushion risks

45
Q

What is risk perception?

A

This is the client’s assessment of the magnitude of the risks being traded off

46
Q

What is risk tolerance?

A

This is the trade-off that clients are willing to make between potential risks and rewards

47
Q

What is self-attribution bias?

A

This is an ego defense mechanism used to take credit for successes, but blaming others for their failures

48
Q

What is self-control bias?

A

This occurs when individuals lack-self discipline and favor immediate gratification over long-term goals

49
Q

What is status quo bias?

A

This occurs when comfort with an existing situation leads to an unwillingness to make changes even though the change is likely to be beneficial

50
Q

What is the strategic management approach to planning?

A

The clients goals and values drive the client / planner relationship - use of SWOT (strengths, weaknesses, opportunities, and threats)

51
Q

What is tone?

A

This is the inflection of the voice or emphasis on certain words that help determine the attitude of the client (happy, humorous, angry, scared, etc)

52
Q

What are values?

A

These are made up of attitudes and beliefs and represent what a person believes to be right

53
Q

What is verbal mirroring?

A

This is where the planner copies the words use, tone of voice, and communication method

54
Q

What is the visual learning style?

A

The client tends to respond to visual objects, such as graphs, charts, pictures, and reading information.

CFP General Principles (8 decks)

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