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CPWA certification - definitive study guide > Domain I - Human Dynamics > Flashcards

Domain I - Human Dynamics Flashcards

1
Q

What types of discipline are issued by the PRB?

A

Public or private censure / suspend or revoke right to use the marks

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2
Q

An answer to the disciplinary petition shall be filed with the Institute staff no later than ______ after the _____ date of the disciplinary petition to respondent.

A

30 days / mailing

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3
Q

Member must notify Institute of a conviction of serious crime within _____.

A

60 days

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4
Q

An appeal from a final order of the PRB must be filed within _____ of the _____.

A

60 days / date of the order

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5
Q

Possible reinstatement after suspension requires petition to Institute within _____ of _____.

A

30 days / expiration of suspension term

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6
Q

Certification requirements - the 4 E’s

A

Experience / Education / Exam / Ethics

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7
Q

CPWA© continuing education requirements?

A

40 hrs every two years (inc. 2 hrs of ethics). As of 1/1/2020: 1 hr of CE every two years must cover tax or regulation.

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8
Q

Institute’s approved nouns?

A

Advisor / Certificant / Consultant / Designee / Professional

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9
Q

Four core values?

EcOLI

A

EcOLI- Ethical conduct / Objectivity / Loyalty / Integrity

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10
Q

Institute Code of Professional Responsibility - 1?

A

Act in the best interest of the client.

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11
Q

Institute Code of Professional Responsibility - 2?

A

Disclose services to be offered and provided,
related charges, and compensation.

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12
Q

Institute Code of Professional Responsibility - 3?

A

Disclose the existence of actual, potential,
and/or perceived conflicts of interest and
relevant financial relationships, direct and/or
indirect. Take appropriate action to resolve or
manage any such conflicts.

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13
Q

Institute Code of Professional Responsibility - 4?

A

Provide clients information needed to make
informed decisions.

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14
Q

Institute Code of Professional Responsibility - 5?

A

Respond to client inquiries and instructions
appropriately, promptly, completely, and
truthfully.

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15
Q

Institute Code of Professional Responsibility - 6?

A

Maintain confidentiality of client information,
however acquired, consistent with legal and
regulatory requirements and firm policies.

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16
Q

Institute Code of Professional Responsibility - 7?

A

Provide competent service by truthful
representation of competency, maintenance
and/or development of professional capabilities,
and, when appropriate, the recommendation of
other professionals.

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17
Q

Institute Code of Professional Responsibility - 8?

A

Comply with legal and regulatory requirements
related to one’s practice of his or her profession.

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18
Q

Institute Code of Professional Responsibility - 9?

A

Maintain a high level of ethical conduct.

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19
Q

People make decisions based more on _____ than _____.

A

probabilities / potential outcomes

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20
Q

Loss aversion?

A

The tendency to feel the impact of losses more than gains

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21
Q

Paradox of Choice: Giving people more choices _____.

A

Does not increase performance or satistaction

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22
Q

Adaptive Markets Hypothesis - Thesis?

A

Markets evolve over time as individuals use numerous evolutionary heuristics and biases to make decisions.

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23
Q

Adaptive Markets Hypothesis - Big Picture?

A

Reconciles Efficient Market Hypotheses with research in behavioral economics.

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24
Q

Adaptive Markets Hypothesis - Conclusions & Results (4)?

SOVI

A

– Survival is primary objective; profit and utility secondary
– Opportunities for arbitrage
– Value in quantitative, fundamental, technical strategies
– Innovation is key to survival and growth

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25
Q

Biases based on Existing Beliefs (6)

A
  • Cognitive Dissonance
  • Conservatism Bias
  • Confirmation Bias
  • Representative Bias
  • Illusion of Control Bias
  • Hindsight Bias
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26
Q

Cognitive Dissonance?

A

Confusion or frustration that arises when an individual receives new information that does not match up with or conform to preexisting beliefs or experiences.

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27
Q

Conservatism Bias?

A

People cling to their prior views or forecasts at the expense of acknowledging new information; individuals are inherently slow to change.

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28
Q

Confirmation Bias?

A

People observe, overvalue, or actively seek out information that confirms what they believe while ignoring or devaluing information that contradicts their beliefs.

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29
Q

Representativeness Bias?

A

A cognitive bias through which individuals process new information using pre-existing ideas or belief; an investor views a particular situation or information a certain way because of similarities to other examples even if it does not really fit into that category.

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30
Q

Illusion of Control Bias?

A

A cognitive bias where people believe they can control or
influence investment outcomes when in reality they cannot.

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31
Q

Hindsight Bias?

A

Cognitive bias where investors perceive investment outcomes as
if they were (had been) predictable, even if they were not; sometimes gives investors a false sense of security when making investment decisions leading them to excessive risk taking.

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32
Q

Biases based on Information Processing (7)?

FAMASOR

A
  • Framing bias
  • Anchoring and adjustment bias
  • Mental accounting
  • Availability bias
  • Self-attribution bias
  • Outcome bias
  • Recency bias
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33
Q

Mental Accounting?

A

A cognitive bias in which individuals treat various sums of money differently based on where these monies are mentally categorized.

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34
Q

Anchoring and Adjustment Bias?

A

A cognitive bias where investors are influenced by purchase
point or arbitrary price levels and cling to these numbers when deciding to buy or sell.

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35
Q

Framing Bias?

A

Cognitive bias where an individual responds to similar situations
differently based on the context in which the choice is presented.

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36
Q

Availability Bias?

A

A cognitive bias where easily recalled outcomes (often from more
recent information) are perceived as being more likely that those that are harder to recall or understand.

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37
Q

Self-Attribution Bias?

A

A cognitive bias where people ascribe successes to their
innate talents and blame failures on outside influences.

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38
Q

Outcome Bias?

A

A cognitive bias in which people often make decisions or
take action based on the outcome of past events rather than by
observing the process by or through which that outcome occurred.

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39
Q

Recency Bias?

A

People more easily recall and emphasize recent events/observations and often extrapolate recent patterns where there are none.

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40
Q

Biases based on Emotions (7)?

ASLOSER

A
  • Affinity bias
  • Status quo bias
  • Loss-aversion
  • Overconfidence bias
  • Self-control bias
  • Endowment bias
  • Regret-aversion bias
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41
Q

Loss-Aversion Bias?

A

Pain of loss is roughly twice as painful as the
pleasure of gains (core tenet of Prospect Theory).

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42
Q

Overconfidence Bias?

A

Unwarranted faith in one’s own thoughts and abilities.

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43
Q

Self-Control Bias?

A

Human tendency to focus on instant gratification
due to lack of discipline, consequently failing to act in the
best interest of long term goals.

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44
Q

Status-Quo Bias?

A

When facing an array of options, status quo bias predisposes
people to select the option that keeps conditions the same.

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45
Q

Endowment Bias?

A

People tend to value an object more when they actually hold
or own it; discounting the value of objects they do not currently possess.

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46
Q

Regret Aversion Bias?

A

People often avoid making decisions or taking action because they are afraid that they will make a mistake; or that looking back the decision they make will prove less than optimal.

47
Q

Affinity Bias?

A

Individuals may make irrational decisions or choices based on how they believe a certain product or service will reflect their values.

48
Q

This behavioral bias is often tied back to the following biases: anchoring and status-quo bias.

A

Sunk-cost fallacy

Investors may continue to hold an investment and
even invest more (e.g., double down) in large part
because of the time, effort and energy they have
already invested in the idea behind the investment.
Thus, they are emotionally tied to the initial choice.

49
Q

This behavioral bias will often cause investors to hold losing investments, hoping the value will rise back up to the point at which they purchased the asset at which time they would plan to sell.

A

Get-Even-Itis

This is done in an effort to prevent realizing a loss and the negative feelings or pain associated with losses.

50
Q

This behavioral bias describes scenarios in which investors typically hold on to losing investments too long but sell winning investments too early.

A

Disposition Effect

The tendency to hold onto losing investments too long can be
tied back to the so called “snake bit effect” where investors
are seeking to avoid losses.

The tendency to sell winners too early may be traced to an
investor seeking to lock in a gain and in doing so either avoid
the risk of losing said gain, and/or to experience the
immediate gratification that comes from the realized gain.

51
Q

This behavioral bias is often associated with a number of others including anchoring, recency, conservatism, and representativeness. It occurs when investors experience losses and then beome more risk-adverse, even to the extent of not wanting to invest in the same investment or asset class, based on their painful experience in the past.

A

Snake-Bit Effect

52
Q

This behavioral bias sees investors often take more chances (risk) once they have gained, won, or experience profits.

A

House Money Effect

53
Q

This behavioral bias translates to the idea that in the investment world, even when investors feel skillful or knowledgeable, they may not be willing to stake claims on investments like stocks, even when they believe they can predict these outcomes based on their own judgment.

A

Ambiguity Bias

54
Q

This behavioral bias sees investors believe that bad investments can happen to others but not them. These investors may fail to fully acknowledge the potential for adverse outcomes of their investment decisions.

A

Optimism Bias

55
Q

Five personality types according to Bailard, Biehl, and Kaiser Model (BB&K Five-Way Model)?

A

Adventurer / Celebrity / Individualist / Guardian / Straight Arrow

56
Q

Preservers

Basic type: Active/Passive?
Risk tolerance level?
Primary bias?

A
  • Passive
  • Low
  • Emotional
57
Q

Follower

Basic type: Active/Passive?
Risk tolerance level?
Primary bias?

A
  • Passive
  • Low to medium
  • Cognitive
58
Q

Independents

Basic type: Active/Passive?
Risk tolerance level?
Primary bias?

A
  • Active
  • Medium to high
  • Cognitive
59
Q

Accumulators

Basic type: Active/Passive?
Risk tolerance?
Primary bias?

A
  • Active
  • High
  • Emotional
60
Q

_____ of wealth is lost by the 2nd generation
_____ of wealth is lost by the end of the 3rd generation
_____ survives and transfers to the 4th generation

A

70% / 90% / <10%

61
Q

Failure in Family Wealth Transfer

_____ due to breakdown in communication and trust within the family unit.
_____ due to heirs not being adequately prepared.
_____ due to other factors including tax consideration, legal issues, etc.

A

60% / 25% / 15%

62
Q

_____ of parents (think G1) expressed a desire to meet
and work with their children’s financial advisor.

_____ of children (think G2) expressed a desire to meet
and work with their parent’s financial advisor.

A

70% / 60%

63
Q

_____ of wealthy individuals expressed a desire to engage
in more consistent and meaningful communication regarding financial matters with their children.

_____ of wealthy individuals actually engage in consistent
and meaningful communication regarding financial matters with their children.

A

2/3rds / 1/3rd

64
Q

1st generation clients of wealth often display these three response types _____ but not _____.

A

Resistance / Receptiveness / Hesitancy

Apathy

65
Q

Immigrants to the Land of Wealth
- Association with wealth?
_____ of wealthy Americans.

Natives to the Land of Wealth
- Association with wealth?
_____ of wealthy Americans.
_____ change advisors within 2-3 yrs. of transfer.

A

New to wealth (lead generation)
80%

Grew up with wealth (next generation)
20%
90%

66
Q

Challenges(4) between 1st and 2nd Generation Wealth?

A
  • Parents often do not allow children enough freedom.
  • Children often suffer from low self-esteem.
  • Parents often neglect their family relationships.
  • Children often do not develop relationships outside their social circles.
67
Q

Family Office Core Services (4)?

A

Advisory / Financial Planning / Strategy / Governance

68
Q

SEC requirements for Family Offices (Family Office Rule)?

A

Family Offices excluded from Advisers Act regulation:
* FO only provides advice to family clients
* FO wholly owned and controlled by family clients
* FO does not hold itself out to public as investment advisor

69
Q

Three types of family offices?

A

Single Family (SFO) / Multi-Family (MFO) / Virtual Family (VFO)

70
Q

Greatest risk/concern of setting up a family office?

A

Cost. Greatest expense within that is personnel.

71
Q

Keys (4) to Successful Families?

ETLD

A

Engagement / Transparency / Learning / Developing

72
Q

Types of capital in the Family Education Plan?

A

FISH - Financial / Intellectual / Social / Human

73
Q

Financial Capital?

A

Financial and/or economic resources; primarily assets and cash flow.

74
Q

Intellectual Capital?

A

Individual or collective capital that comes from
intelligence, knowledge, creativity or ingenuity.

75
Q

Social Capital?

A

Potential, opportunity or ability to bring the other capital elements (particularly human) together for the benefit of the greater good; often thought of inside the framework of the family itself in the HNW space.

76
Q

Human Capital?

A

Includes one’s knowledge, skills, health, motivation, endurance, effectiveness, character traits, experience, etc. (unique to each individual).

77
Q

Prime learning ages for monetary/wealth skills?

Most money related skills have been established before age _____.

A

7/8 to 13/14

30

78
Q

Effective measurement of outcomes is done in less than _____% of formal programs.

A

20

79
Q

Financial Education Misconceptions

_____% of students say they learn everything they know about moeny from their parents.

_____% of parents believe their children learn everything they need to know about money at school.

A

90 / 87

80
Q

Financial Education - Competency

Primary sources and uses of money(funds) (5)?

A

Earn / Save / Spend / Invest / Share

81
Q

Visual tool. Lists family members. Describes relationships within the family. May include important history. Lists those involved in family business and roles and responsibilities.

A

Family Genogram

82
Q

Family Governance goals (4)?

DCDE

A
  • Define process for family decision making
  • Clarify family roles, rights and responsibilities
  • Develop policies and procedures
  • Engage and empower the next generation
83
Q

Steps (6) for an effective family meeting?
DECOOC

A
  • Design collaboratively and create expectations
  • Establish purpose and goals
  • Clarify expectations and format
  • Obtain agreement
  • Obtain inormation and invite participants
  • Create a safe environment
84
Q

Family Mission Statement?

A

A combined, unified expression from all family members of what your family is all about what it is you really want to do and be and the principles you choose to govern your family life.

85
Q

Family Values Statement?

A

Often found inside (a part) of the family mission statement. This document intended to create or develop a shared and core set of principles and beliefs of the family unit.

86
Q

Family Charter or Constitution?

A

Document typically includes;
* formalization of the family structure and mission of the family business
* defines roles and responsibilities
* develops policies and procedures in line with family values and goals
* determines the process for resolving family business disputes

87
Q

Confusion or frustration that arises when an individual receives new information that does not match up with or conform to preexisting beliefs or experiences.

In psychology, cognitions represent attitudes, emotions, beliefs, or values. When people attempt to harmonize conflicting cognitions, this can occur. People may rationalize their choices, even when faced with facts that demonstrate that they made poor decisions.

Bias? Bias type?

A

Cognitive dissonance

Existing beliefs

88
Q

People cling to their prior views or forecasts at the expense of acknowledging new information; individuals are inherently slow to change.

This bias occurs when people maintain their prior views or forecasts by inadequately incorporating new information. Investors often under react to new information and fail to modify their beliefs and actions.

Bias? Bias type?

A

Conservatism bias

Existing beliefs

89
Q

People observe, overvalue, or actively seek out information that confirms what they believe while ignoring or devaluing information that contradicts their beliefs.

This bias can cause investors to only seek out information that confirms their beliefs about an investment, and not seek out information that may contradict their beliefs. This behavior can leave investors in the dark regarding, for example, the imminent decline of a stock.

Bias? Bias type?

A

Confirmation bias

Existing beliefs

90
Q

A cognitive bias through which individuals process new information using pre-existing ideas or belief; an investor views a particular situation or information a certain way because of similarities to other examples even if it does not really fit into that category.

This bias occurs as a result of a flawed perceptual framework when processing new information using pre-existing ideas. For example, an investor may view a particular stock as a value stock because of similarities to an earlier value stock that was a successful investment, even if the new investment is not actually a value stock.

Bias? Bias type?

A

Representative bias (gambler’s fallacy)

Existing beliefs

91
Q

A cognitive bias where people believe they can control or influence investment outcomes when in reality they cannot.

This bias contributes, in general, to investor overconfidence. Investors who have been successful in business or other professional pursuits believe that they should also be successful in the investment realm. What they find is that they may have had the ability to shape outcomes in their vocation, but investments are a different matter altogether.

Bias? Bias type?

A

Illusion of Control bias

Existing beliefs

92
Q

Cognitive bias where investors perceive investment outcomes as if they were (had been) predictable, even if they were not; sometimes gives investors a false sense of security when making investment decisions leading them to excessive risk-taking.

When an investment appreciates, investors with this bias tend to rewrite their own memories to portray the positive developments as if they were predictable. Over time, this rationale can inspire excessive risk taking because hindsight-biased investors begin to believe that they have superior predictive powers, when, in fact, they do not. The bursting of the technology bubble is an example of this bias in action.

Bias? Bias type?

A

Hindsight bias

Existing beliefs

93
Q

A cognitive bias in which individuals treat various sums of money differently based on where these monies are mentally categorized.

This bias can cause people to imagine that their investments occupy separate “buckets,” or accounts. These categories might include a college fund or money for retirement. Envisioning distinct accounts to correspond with financial goals however, can cause investors to neglect positions that offset or correlate across accounts. This can lead to suboptimal aggregate portfolio performance.

In the same vein as anchoring bias, this bias can cause investors to succumb to the “house money” effect, wherein risk-taking behavior escalates as wealth grows. Investors exhibiting this rationale behave irrationally because they fail to treat all money as fungible. Biased financial decision making can, of course, endanger a portfolio.

Bias? Bias type?

A

Mental accounting

Information processing

94
Q

A cognitive bias where investors are influenced by purchase point or arbitrary price levels and cling to these numbers when deciding to buy or sell.

Individuals often rely too heavily on certain information (often the first data points received) when making decisions.

Bias? Bias type?

A

Anchoring and adjustment bias

Information processing

95
Q

Cognitive bias where an individual responds to similar situations differently based on the context in which the choice is presented.
This bias describes the tendency of investors to respond to various situations differently based on the context in which a choice is presented.

The use of risk tolerance questionnaires provides a good example. Depending upon how questions are asked, framing bias can cause investors to respond to risk tolerance questions in an either unduly conservative or aggressive manner. For example, when questions are worded in the “loss” frame, a risk-averse response is more likely. When questions are worded in the “gain” frame, risk-seeking behavior is the likely response.

Bias? Bias type?

A

Framing bias

Information processing

96
Q

A cognitive bias where easily recalled outcomes (often from more recent information) are perceived as being more likely that those that are harder to recall or understand.

Description: This bias occurs when people use a rule-of-thumb to estimate the likelihood of an outcome based on how easily the outcome comes to mind.

As an example, suppose an investor is asked to identify the “best” mutual fund companies. Most investors would perform a “Google” search and, most likely, find funds from firms that engage in heavy advertising –such as Fidelity or Schwab. Investors subject to availability bias are influenced to pick funds from such companies, even though some of the best-performing funds advertise very little if at all.

Bias? Bias type?

A

Availability bias

Information processing

97
Q

A cognitive bias where people ascribe successes to their innate talents and blame failures on outside influences.

Investors often believe that the reason an investment choice they made went up is not due to random factors (e.g., economic conditions or competitor failures), but rather success was due to the investor’s investment savvy. If the investment choice loses money, investors may believe that it was random factors (e.g., economic conditions or competitor failures).

Bias? Bias type?

A

Self-attribution bias

Information processing

98
Q

A cognitive bias in which people often make decisions or take action based on the outcome of past events rather than by observing the process by or through which that outcome occurred.

Investors who are susceptible to this bias may make mutual fund investments based on their focus on the outcome of a past investment experience related to this decision—such as their manager’s track record or the asset class performance of that particular investment—and are not focused on how the returns were generated or why they should be investing in that asset class.

Bias? Bias type?

A

Outcome bias

Information processing

99
Q

People more easily recall and emphasize recent events/observations and often extrapolate recent patterns where there are none.

This bias can cause investors to extrapolate patterns and make projections based on historical data samples that are too small to ensure accuracy. Investors who forecast future returns based too extensively on only a recent sample of prior returns are vulnerable to purchasing at price peaks. These investors tend to enter asset classes at the wrong times and end up experiencing losses.

Bias? Bias type?

A

Recency bias

Information processing

100
Q

Pain of loss is roughly twice as painful as the pleasure of gains (core tenet of Prospect Theory).

This bias prevents people from unloading unprofitable investments, even when they see no prospect of a turnaround. Some industry veterans have labeled this phenomenon “get-even-itis.” This bias also drives poor decisions based on the so-called “sunk-cost fallacy”.

Bias? Bias type?

A

Loss-aversion

Emotions

101
Q

Unwarranted faith in one’s own thoughts and abilities.

Emotional (some also consider this cognitive). Overconfident investors often hold under-diversified portfolios, thereby taking on more risk without a commensurate change in risk tolerance. Often, overconfident investors don’t even know that they are accepting more risk than they would or should normally tolerate.

Bias? Bias type?

A

Overconfidence bias

Emotions

102
Q

Human tendency to focus on instant gratification due to lack of discipline, consequently failing to act in the best interest of long-term goals.

This bias can cause investors to lose sight of basic financial principles, such as compounding of interest, dollar cost averaging, and similar discipline behaviors that, if adhered to, can help create significant long-term wealth.

Bias? Bias type?

A

Self-control bias

Emotions

103
Q

When facing an array of options, this bias predisposes people to select the option that keeps conditions the same.

This bias is demonstrated by the investor that has been doing things a certain way for many years, and then hires a new financial advisor. The new advisor may propose practical changes only to find that the investor takes only part of or none of the advice. It’s not that the client doesn’t need good advice, they are simply stuck in the status-quo.

Bias? Bias type?

A

Status quo bias

Emotions

104
Q

People tend to value an object more when they actually hold or own it; discounting the value of objects they do not currently possess.

This bias occurs when a person assigns greater value to an object he or she possesses and may lose compared to an object of the same value he or she does not possess and has the potential to gain.

Bias? Bias type?

A

Endowment bias

Emotions

105
Q

People often avoid making decisions or taking action because they are afraid that they will make a mistake; or that looking back the decision they make will prove less than optimal.

This bias can cause investors to be too conservative in their investment choices. Having suffered losses in the past, some investors have trouble making sensible new investments. This behavior can lead to long term underperformance and can jeopardize investment goals.

Bias? Bias type?

A

Regret-aversion bias

Emotions

106
Q

Individuals may make irrational decisions or choices based on how they believe a certain product or service will reflect their values.

Investors subject to this bias may make investments in companies that make products or deliver services that they like but don’t examine carefully enough the soundness of the investment characteristics of those companies.

Bias? Bias type?

A

Affinity bias

Emotions

107
Q

Investors may continue to hold an investment and even invest more (e.g., double down) in large part because of the time, effort and energy they have already invested in the idea behind the investment. Thus, they are emotionally tied to the initial choice.

This is often tied back to the following biases: anchoring and status-quo bias.

Bias? Bias type?

A

Sunk-cost fallacy

Addtional behavioral

108
Q

Investors will often hold losing investments, hoping that the value will rise back up to the point at which they purchased the asset at which time they would plan to sell. They do so in an effort to prevent realizing a loss and the negative feelings or pain associated with losses.

Bias? Bias type?

A

Get-Even-Itis

Addtional behavioral

109
Q

This effect describes scenarios in which investors typically hold on to losing investments too long but sell winning investments too early.

Bias? Bias type?

A

Disposition effect

Addtional behavioral

110
Q

This occurs when investors experience losses and then become more risk-adverse, even to the extent of not wanting to invest in the same investment or even asset class, based on their painful experience in the past.

Bias? Bias type?

A

Snake-bit effect

Additonal behavioral

111
Q

Investors often take more chances (take on more risk) once they have gained, won, or experienced profits. It’s as though they feel that they are now playing with someone else’s money and feel more comfortable taking on additional risk.

Bias? Bias type?

A

House money effect

Addtional behavioral

112
Q

This may be best explained using an example.
Suppose a researcher asks Mr. Jones to predict whether a certain sports team will win its upcoming game, and he gives the team a 60% chance of winning. Further suppose that the researcher presents Mr. Jones with a 50%/50% slot machine (no ambiguity) and asks which bet is preferable. If Mr. Jones is experiencing this, he may choose the slot machine even if he feels confident about the team winning. Translating this idea to the investment world, even when investors feel skillful or knowledgeable, they may not be willing to stake claims on “ambiguous” investments like stocks, even when they believe they can predict these outcomes based on their own judgment.

Bias? Bias type?

A

Ambiguity bias

Addtional behavioral

113
Q

Many overly optimistic investors believe that bad investments can happen to others but not them. These investors may fail to fully acknowledge the potential for adverse outcomes of their investment decisions. An example of optimism bias is the high allocation of company stock by employees in their 401(k) retirement plans. Undue optimism leads these employees to perceive their own firms as being unlikely to suffer from economic misfortunes.

Bias? Bias type?

A

Optimism bias

Addtional behavioral

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