Behavioral Finance 2- Various behavioral biases and how they may impact client decision making Flashcards
Categorize behavioral biases as they are based on emotions, information processing, and existing beliefs.
Distinguish between behavioral biases that are best handled through accommodation and biases that are best handled by education.
Cognitive biases are best handled through education/moderation.
Emotional biases are best handled through accommodation.
What are the 6 emotional biases?
6 Emotional Biases- ( LOSERS)
Loss Aversion- prefer avoiding losses- losses hurt more than gains feel good
Over Confidence - beliefs are more reliable
Status Quo-any change from baseline is perceived as a loss- eg ACAT- old holding
Endowment-over value what you earn
Regret Aversion-Avoiding pain of regret
Self Control - Illusion of Control- fail to pursue a goal- lack of short-term discipline
What are cognitive biases?
10 Cognitive Biases- CHARMIFCAR
Confirmation-affirm own thinking
Hindsight- predictable afterwards
Anchoring or Adjustments- holding on to initial info- does not have to be a long held belief like conservatism
Representativeness- resemble or “representation of” small numbers (using a small sample size to
Mental Accounting- expense categories or bucketing
Illusion of Control- belief influences outcomes
Framing-context matters- overcome by providing education
Conservatism- holding on to long held beliefs and values
Availability-first thing you think of
Recency Bias- Recent experiences, biggest impact
Distinguish between level of wealth (fundedness) that is best handled through accommodation versus education/ moderation.
High level of wealth/ moderate
Low level of wealth- educate/ moderate
