Client and Planner Attitudes, Values, Biases and Behavioral Finance Flashcards
A client experiencing the “ostrich effect” is exhibiting what kind of behavior?
Paying more attention to investments when good news is anticipated, and conversely, paying less attention to investments when bad news is expected
What are the most effective ways to learn about clients’ values?
Values assessments and interviews
Name the three predominant learning styles.
- Auditory
- Visual
- Tactile (kinesthetic)
Define “status quo bias.”
The reluctance to change a previously made decision; more likely when clients must make decisions under uncertainty.
What is the “prospect theory”?
To avoid a loss situation, individuals often make impulsive or intuitive decisions that are sometimes very risky and financially detrimental. Investors have a stronger emotional response to loss than gains.
Define “individual risk tolerance.”
A person’s willingness and comfort in taking financial risk
What is the “disposition effect”?
Investors’ tendency to sell profitable stocks too quickly in order to book profits (loss aversion) and thus miss out on the potential profit had they held on to the stock a little longer.
What does “risk needed” mean?
It refers to the amount of risk necessary to achieve a goal or set of goals.
What does it mean to have a “familiarity bias”?
You are more likely to invest in certain companies based simply on familiarity with those companies.
Differentiate between “home-company bias” and “home-country bias.”
Home-company bias is when individuals are more likely to invest in stocks of local corporations than in stocks from other regions.
Home-country bias is when individual investors are more likely to invest in stocks of corporations based in the country they live in than invest in foreign stocks.
Differentiate between “overconfidence bias” and “confirmation bias.”
Overconfidence bias is when one overestimates his/her knowledge and is overconfident about his/her ability to predict future outcomes.
Confirmation bias is the tendency to seek out, and remember, information that confirms (rather than disconfirms) what one already believes to be correct.
The “sunk cost fallacy” refers to what?
Situations wherein individuals irrationally consider past costs when making decisions, rather than using a purely rational economic perspective and considering only the future variable costs
Which elements are at the intersection of financial decision-making and behavior when it comes to money issues?
Relationships, emotions, knowledge, perceptions
Differentiate between “risk perception” and “risk capacity.”
Risk perception is an individual’s perceived sense of potential loss from an investment.
Risk capacity is generally considered an individual’s ability to take risks based on their resources.
