Behavioral Finance

Question 1

Cognitive Errors vs. Emotional Bias

Answer 1

cognitive is easier to correct –> only require modest changes to TF (Traditional Finance)

Emotional = harder to correct –> require larger changes to TF

Question 2

Cognitive Errors and Cognitive Dissonance

Answer 2

Note that conservatism is more of an lack of desire/willingness to seek out new info - it’s an important one / comes up often in exam

vs.

confirmation = open to new info but only if it supports original view (another popular one) –> can lead to overconcentration

Question 3

Emotional Biases

Answer 3

Question 4

Barnewell and BBK Models

Answer 4

just need to have GENERAL UNDERSTANDING of these - only 2 questions on it in the last like 10 yrs

Question 5

Pompian Model

Answer 5

just need to have GENERAL UNDERSTANDING - only 2 questions on it in the last like 10 yrs

Question 6

Disposition Effect

Answer 6

Disposition effect is a tendency emanating from loss aversion. Because of the fear of loss, Client 1 is triggered to sell winners early and hold losers for too long in expectation that the losers will eventually outperform.