BEHAVIORAL FINANCE

Question 1

is the study of the influence of psychology on the behavior of investors or financial analysts. It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own biases.

investors not always rational, limts self control, influenced biases.

Answer 1

Behavioral finance

Question 2

helps us understand that our mind is one part, and our heart is another part of making choices or decisions.

Answer 2

Behavioral finance

Question 3

is all about
emotions,
personalities,
psychology, and
sociology.

Answer 3

Behaviour

Question 4

is all about
numbers, equations,
statistics, and balance
sheets.

Answer 4

finance

Question 4

helps to explain the difference between expectations of efficient, rational investor behavior and actual behavior.

Answer 4

Behavioral finance

Question 5

is key to enhancing the client experience, deepening relationships, retaining clients and potentially delivering better outcomes.

Answer 5

behavioral finance

Question 6

is about making the right decisions that are free from any kind of biases and errors. It helps in understanding investor behavior better and helps in improving the financial capability of individuals.

Answer 6

Behavioural Finance

Question 7

Traits of behavioral finance
are:

Answer 7

• Investors are treated as
  “normal” not “rational”
• They actually have** limits** to their
  self-control
• Investors are **influenced by their ** own biases
• Investors make cognitive errors that can lead to wrong decisions

Question 8

two pillars of behavioral finance

Answer 8

1. cognitive psychology (how people think) and
2. the limits to arbitrage (when markets will be inefficient).

Question 8

are irrational beliefs or behaviours that can unconsciously influence our decision-making process. They are generally considered to be split into two subtypes – emotional biases and cognitive biases.

Answer 8

Behavioural biases

Question 9

involve taking action based on our feelings rather than concrete facts, or letting our emotions affect our judgment.

Answer 9

Emotional biases

2 TYPES OF BEHAVIORAL BIASES

Question 10

a tendency to be over-reliant on the first piece of information you hear

Answer 10

Anchoring bias

most common behavioural biases

Question 11

are errors in our thinking that arise while processing or interpreting the information that is available to us.

Answer 11

Cognitive biases

2 TYPES OF BEHAVIORAL BIASES

Question 12

being** too confident** in your abilities, which can lead to taking excess risks

Answer 12

Overconfidence effect

most common behavioural biases

Question 13

where an individual adopts a new belief only because the belief is held by many other people

Answer 13

Bandwagon effect

most common behavioural biases

Question 13

a tendency to value something you own more highly than something you don’t own, for example, a cherished fund in your portfolio

Answer 13

Endowment effect

most common behavioural biases

Question 13

a resistance to change and a preference for things to stay the same, leading to inaction

Answer 13

Status quo effect

most common behavioural biases

Question 14

is one of the most dangerous things an investor can do, especially in volatile or higher-risk markets.

Answer 14

Panic selling

Question 14

is an emotional bias that involves** taking action**
(or failing to take action)** to avoid a loss**. It is rooted in the fact that humans tend to feel the pain of a loss twice as intensely as the joy of an equivalent gain*.

Answer 14

Loss aversion

Question 15

can also occur when investors fail to accept new information that relates to the investment case. The
temptation may be to ignore any new data that contradicts their initial view, or to look for reasons to dismiss it.

Answer 15

Confirmation bias

Question 15

is an example of a cognitive bias. It occurs when we focus on information that confirms our previous beliefs, or we give this information more prominence than other data.

Answer 15

Confirmation bias

Question 16

is a limit to the way we learn. When we mistakenly think we know more than we actually do, we tend to miss
information that we need to make an informed decision.

Answer 16

1 Self-Deception

Decision-Making Errors and Biases

Question 16

should take all of the available information, weight it appropriately and **make a balanced decision. **They should ask themselves “what do these data tell me and how do I invest on that basis?” while assimilating any new information that arises into the investment case.

Answer 16

rational investor

Question 17

refers to
information-processing errors.

Answer 17

2 Heuristic Simplification

Question 18

refers to our making decisions based on our current emotional state. Our current mood may take our decision making off track from rational thinking.

Answer 18

3 Emotion

Question 19

is how our decision making is
influenced by others.

Answer 19

4 Social Influence

Question 20

How do we avoid bias when managing
our clients’ money?

Answer 20

• Intellectual self-discipline
• Playing devil’s advocate
• We look at the whole picture
• We focus on the fundamentals
• We work as a team
• We use statistical techniques

Question 21

One of the most important ways we manage biases is **simply to be aware of them when we make investment decisions. **We will ask ourselves ‘am I being influenced by anything other than fundamental, rational reasons? Does the evidence support my view?’

Answer 21

Intellectual self-discipline

Question 21

Once we have reached a conclusion, we will try to build a counter-argument as best as we can. This can be difficult, but it is important to be as thorough as possible and to compare the opposing arguments before making a final decision.

Answer 21

Playing devil’s advocate

Question 22

When creating or reviewing our investment strategies we look ata number of different areas as part of our macroeconomicoverview. We set out a number of specific factors and measuresin advance to monitor at a top level. This prevents us fromcherry-picking those data that support our views (thereforeresisting confirmation bias), while also allowing us to dig deeperand gain a better insight into specific economic factors.

Answer 22

We look at the whole picture

Question 23

We have an Asset Allocation Committee that works together on any changes to our asset models, rather than relying on an individual’s views. We believe it is important to maintain a culture that promotes friendly challenges to views and encourages robust discussions around all investment decisions.

Answer 23

We work as a team

Question 24

ensure that relationships are statistically significant. A line of best fit may look like it has a trend, but we need to crunch the numbers to be sure.

Answer 24

We use statistical techniques