FUND CH2 Interpersonal Communication & Behavioral Finance

Question 1

3 Schools of Counseling

Answer 1

o Developmental
o Humanistic
o Cognitive-Behavioral

Question 2

“Developmental” School of Thought (2 things)

Answer 2

• Referred to as the “Developmental Paradigm”

* Believes that human development occurs in stages over time.

Question 3

“Humanistic” School of Thought (4 things)

Answer 3

• Referred to as the “Humanistic Paradigm”
• Dominated by theorists whose models have their origins from a shared philosophical approach.
• A Humanistic counselor would define mental health as having congruent and aligned thoughts, feelings and behavior.
• Goals in treatment are centered on establishing congruence and acceptance of personal responsibility.

Question 4

“Cognitive-Behavioral” School of Thought (3 things)

Answer 4

• Referred to as the “Cognitive-Behavioral Paradigm”
• Humans are beings that are subject to the same learning principles that were established in animal research.
• The counselor’s challenge lies in performing a sound
evaluation of how reinforces are maintaining problematic self-talk behaviors.

Question 5

Signs as a Element of Communication

Answer 5

word, object, gesture, tone, quality image, substance or other reference according to a code of shared meaning among those who use that sign for communication purposes.

Question 6

What are two Nonverbal Behaviors or “Body Language”

Answer 6

• Nonverbal behaviors are mainly provided from the body and the voice.
• Body position, body movement, voice tone, and voice pitch

Question 7

Should the financial advisor’s relationship with the client should be dominated by “active listening” on the part of the advisor or passive listening.

Answer 7

active listening

Question 8

Passive Listening (2 things)

Answer 8

o Listening in the normal or usual conversation or
conversational setting to which most people are
accustomed at seminars, in class, or social gatherings, or at sermons.
o Invoked when communication rests entirely on another person and the person receiving the information sits back and listens.

Question 9

Active Listening (5 things)

Answer 9

o Requires the listeners undivided attention.
o Involves concentration of what the speaker is saying.
o Listener must put aside irrelevant thoughts.
o The advisor should not think about “what to say next,”but should be listening and observing the speaker’s body language.
o The advisor should also restate the client’s statements as part of the process of feedback under active listening.

Question 10

Open Question vs. Closed Question

Answer 10

• Open Question- One that will result in a person answering with a lengthy response.
• Closed Question- Seeks a response that is very specific and commonly
involves an answer that can be accomplished with a single word or two.

Question 11

Traditional Finance (2 things)

Answer 11

o Also referred to as Modern Portfolio Theory
o Some of the concepts of the theory are not necessarily modern and have been subject to much debate and change over recent decades.

Question 12

Traditional Finance is premised on 4 basic premises:

Answer 12

o Investors are rational
o Markets are efficient
o The Mean-Variance Portfolio Theory governs
o Returns are determined by risk (Beta)

Question 13

Behavioral Finance (2 things) and 4 basic assumptions:

Answer 13

• Does not fully reject Traditional Finance’s views or methods
• Contains much of the scientific framework and lessons learned from Traditional Finance
- Amends some of it with basic assumptions based on
normal, more human-like behavior
- Supplements other aspects of it with notions from
psychology and sociology

Behavioral Finance Assumptions
• Investors are “normal”. What makes investors normal instead of rational: Cognitive biases, errors, and being human
• Markets are not efficient
• The behavioral portfolio theory governs
• Risk alone does not determine returns

Question 14

Patterns of Cognitive Biases- Anchoring

Answer 14

o Attaching, or anchoring, one’s thoughts to a reference point even though there may be no legal relevance or is not pertinent to the issue in question.
o Also known as conservatism or belief perseverance.
o Fairly common in situations where decisions are being made in situation that are novel or new to the decision
maker.

Question 15

8 Patterns of Cognitive Biases

Answer 15

• Anchoring
• Confirmation Bias
• Gambler’s Fallacy
• Herding
• Hindsight Bias
• Overconfidence
• Overreaction
• Prospect Theory

Question 16

Patterns of Cognitive Biases – Confirmation

Bias

Answer 16

o A common phrase to explain the confirmation bias is that
“you do not get a second chance at a first impression.”
o People tend to filter information and focus on information
supporting their opinions.

Question 17

Patterns of Cognitive Biases – Gambler’s

Fallacy

Answer 17

o One of the incorrect assumptions from the world of

probabilities. In the realm of probabilities, misconceptions can lead to faulty predictions as to occurrences of events.

Question 18

Patterns of Cognitive Biases – Herding

Answer 18

o People tend to follow the masses, or the “herd.”
o Believed that herding is based on:
A person’s desire to conform or be accepted by a
certain group. People believe that if such a large group of people believe something to be correct, then the chances are that the conclusion or decision they have made is also correct.

Question 19

Patterns of Cognitive Biases – Hindsight Bias

Answer 19

o Looking back after the fact is known.
o May lull the investor into believing they can perform
better or more efficiently when armed with this bias.

Question 20

Patterns of Cognitive Biases –

Overconfidence

Answer 20

o Usually concerns an investor that listens mostly to himself or herself.
o An investor with overconfidence usually mostly relies on their skill and capabilities to do their homework and make their own decisions.

Question 21

Patterns of Cognitive Biases – Overreaction

Answer 21

o A common emotion towards the receipt of news or
information.
o The overweighting of sample information.

Question 22

Patterns of Cognitive Biases Prospect Theory

Answer 22

o Provides that people value gains and losses differently and will base their decisions on perceived gains rather than perceived losses.

Question 23

The Disposition Effect (4 things)

Answer 23

• The reluctance of an investor to realize a loss in a Behavioral framework stems from a combination of 2 cognitive biases and an emotion.
• The cognitive biases are ‘faulty framing’ where normal investors do not mark their stocks to market prices, interfacing with the cognitive bias of ‘hindsight’.
• Normal investors do not acknowledge the loss in value (referred to as paper loss) because an open account means that there is still a chance that the stock price will rise.
• The normal investor does not consider the stock a loser until the stock is sold, at which time the loss is technically realized in the mind of the normal investor.