Chapter 3

Question 0

____ looks at the irrational Behaviour of individual investors

Answer 0

Behavioral Finance Micro (BFMI)

Question 1

This term is used to define the application of psychology to humans in relation to investing

Answer 1

Behavioral finance

Question 2

____ looks at irregularities in the overall market

Answer 2

Behavioral Finance Macro (BFMA)

Question 3

Homo economicus translates to

Answer 3

Rational economic individual

Question 4

This term is used to describe anomalies or irregularities in the overall market

Answer 4

Behavioural Finance Macro (BFMA)

Question 5

Homo economicus is based on 3 priniciples

Answer 5

Perfect rationality
Perfect self-interest
Perfect information

Question 6

Name the 3 forms of efficient market hypothesis

Answer 6

• The weak form
• The semi-strong form
• The strong form

Question 7

The efficient market hypothesis has a number of persistent anomalies. Name them…

Answer 7

Fundamental anomalies
Technical anomalies
Calendar anomalies

Question 8

2 main things a client expects from an advisor

Answer 8

1. An understanding of the client’s objectives

2. Investment returns that are consistent with the objectives

Question 9

A ____ can be technically defined as statistical information processing or memory errors that are common to all human beings

Answer 9

Cognitive bias

Question 10

Name three personality dimensions

Answer 10

idealism versus pragmatism
framing versus integrating
reflecting versus realism

Remember the saying “Friends in Regina invite people regularly”

Question 11

This allocation method may slightly underperform over the long-term have lower risk but it is an allocation the client comfortably adhered to over the long run

Answer 11

Best practical allocation

Question 12

Which of the following is an emotional bias?
A.	Conservatism.		  	 
B.	Confirmation.		  	 
C.	Endowment.		  	 
D.	Overconfidence

Answer 12

Endowment

General Feedback: People who are subject to endowment bias place more value on an asset they hold property rights to than on an asset they do not hold property rights to.

Question 13

Should you moderate or adapt to a person with lower wealth levels?

Answer 13

Moderate

Question 14

Should you moderate or adapt to a bias if a client is wealthy?

Answer 14

Adapt

Question 15

____ is used in problem solving through the availability heuristic.

Answer 15

Cognitive Bias

Question 16

This is a mental state that arises spontaneously, rather than through conscious effort.

Answer 16

Emotional Biases

Question 17

A ____ bias can be technically defined as basic statistical, information processing or memory errors that are common to all human beings. ____ biases include heuristics, such as anchoring and adjustment, availability and representativeness biases. Other ____ biases include ambiguity aversion, self-attribution and conservatism.

Answer 17

Cognitive