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CFP Coursework > General Financial Planning - FP511 - Module 2 > Flashcards

General Financial Planning - FP511 - Module 2 Flashcards

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1
Q

Define: Behavioral Finance

A

A field of study that relates behavioral and cognitive psychology to financial planning and economics in an attempt to understand why people act irrationally during the financial decision-making process.

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2
Q

During which stage of the financial planning process should planners measure their client’s psychological abilities to deal with uncertain outcomes?

A

The data-gathering step.

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3
Q

The client’s risk assessment is best done by gathering what type of data?

A

Qualitative, or subjective, data collection

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4
Q

Define: Risk Tolerance

A

The tradeoff that clients are willing to make between potential risks and rewards, with some probability of negative outcomes.

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5
Q

Define: Risk Preference

A

The attitude a client has towards financial risks.

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6
Q

Define: Risk Perception

A

The subjective judgment that clients make when they are asked to describe and evaluate the risk of financial decisions.

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7
Q

Define: Risk Capacity

A

The degree to which a client’s financial resources can mitigate risk.

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8
Q

Define: Risk Literacy

A

The ability of a client to comprehend and act upon information regarding financial risk.

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9
Q

Define: Perception

A

An individual’s personal awareness of things, people, events, or ideas.

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10
Q

Define: Judgment

A

Involves making conclusions about what has been perceived.

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11
Q

What type of questions require clients to answer in their own words?

A

Open-ended questions

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12
Q

_____________ reflect a person’s wants, opinions, and values.

A

Attitudes

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13
Q

_____________ are a type of attitude because they reveal the understanding of some aspect of a person’s life.

A

Beliefs

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14
Q

_____________ are attitudes and beliefs for which a person feels strongly.

A

Values

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15
Q

What are the 3 learning styles?

A
  • visual
  • auditory
  • kinesthetic
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16
Q

Visual learners will express themselves through _____________, and often have interests such as _____________.

A
  • facial expressions
  • movies and spectator sports
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17
Q

Auditory learners express themselves through _____________, and often enjoy _____________.

A
  • words
  • music and conversation
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18
Q

Kinesthetic learners often express themselves through _____________, and tend to enjoy _____________.

A
  • body language
  • physical activities
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19
Q

What would each learning style benefit most from during a meeting?

A
  • visual: including visuals in the presentation
  • auditory: needs, priorities, and goals discussed before being reduced to writing
  • kinesthetic: write goals and objectives in bullet points
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20
Q

T/F: Traditional financial theory asserts that individuals generally make rational decisions regarding their money.

A

TRUE
However, financial planners often encounter cases where emotions and psychology have caused clients to make irrational choices.

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21
Q

During a risk assessment, what are the 5 components of risk that should be measured?

A
  • risk tolerance
  • risk preference
  • risk perception
  • risk capacity
  • risk literacy
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22
Q

T/F: Judgment is an individual’s personal awareness of things, people, events, or ideas.

A

FALSE
- perception is defined
- judgment involves making conclusions about what is perceived

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23
Q

Define: Illusion of Control

A

You believe you can control the outcome of an even when you cannot.

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24
Q

Define: Money Illusion

A

You have a tendency to think one dollar has the same value today, tomorrow, and into the future, without considering inflation.

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25
Q

Define: Conservatism Bias

A

You initially form a rational view but fail to change that view as new information becomes available.

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26
Q

Define: Hindsight Bias

A

You have a selective memory of the past and have a tendency to remember your correct views and forget your errors.

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27
Q

Define: Confirmation Bias

A

You look for ways to justify your current beliefs.

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28
Q

Define: Representativeness

A

When considering your choices in a decision, you tend to recall a past experience similar to the present decision-making situation, and assume one is like the other.

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29
Q

Define: Mental Accounting

A

You tend to place money into separate mental “accounts” based on the purpose of these accounts.

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30
Q

Define: Cognitive Dissonance

A

You have conflicting attitudes, beliefs, or behaviors that cause a feeling of mental discomfort. This leads to changing some of your attitudes, beliefs, or behaviors to reduce your discomfort and feel more balanced.

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31
Q

Define: Self-Attribution Bias

A

You take credit for your success and either blame others or external influences for your failures.

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32
Q

Define: Anchoring

A

You make irrational decisions based on information that should have no influence on the decision at hand.

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33
Q

Define: Outcome Bias

A

You tend to take a course of action based on the outcome of prior events, ignoring current conditions.

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34
Q

Define: Framing Bias

A

You process and respond to information based on the manner in which it is presented.

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35
Q

Define: Recency Bias

A

You give recent information more importance because you remember it most distinctly.

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36
Q

How can someone overcome illusion of control?

A
  • seek opposing viewpoints to consider alternative outcomes
  • keep good records to document the thinking behind ideas and review results to see if there is a pattern
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37
Q

T/F: Research has shown that traders with higher levels of illusion of control perform poorer than those with lower levels.

A

TRUE

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38
Q

What are the consequences and implications of conservatism?

A
  • unwilling or slow to update a view, and therefore, hold an investment too long
  • hold an investment too long to avoid the mental effort or stress of updating a view
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39
Q

What are the consequences and implications of hindsight bias?

A
  • overestimate the rate at which they correctly predicted events and reinforce and emotional overconfidence bias
  • become overly critical of the performance of others
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40
Q

How do you identify and resolve hindsight bias?

A
  • ask “does my client really remember what he predicted and recommended?”
  • maintain and review records to determine past errors and successes
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41
Q

Define: Base Rate Neglect

A

When the base rate (probability) of the initial classification is not adequately considered. Essentially, the classification is taken as being 100% correct with no consideration that it could be wrong.

42
Q

Define: Sample-Size Neglect

A

Making the initial classification based on an overly small and potentially unrealistic sample of data.

43
Q

Define: Selective perception

A

Individuals only register information that appears to affirm an already chosen decision.

44
Q

Define: Selective Decision-Making

A

-usually occurs when commitment to an original decision course is high
- rationalizes actions that enable a person to adhere to the original course

45
Q

Define: Self-Enhancing Bias

A

The tendency to claim an irrational degree of credit for successes.

46
Q

Define: Self-Protecting Bias

A

The irrational denial of responsibility for failure.

47
Q

T/F: Emotional biases are more difficult to overcome and may have to be accommodated.

A

TRUE
They are not related to conscious thought, and stem from feelings, impulses, and intuition.

48
Q

Define: Loss Aversion

A

You fear losses much more than you value gains, and you prefer avoiding losses to acquiring the same amount in gains.

49
Q

Define: Overconfidence

A

You believe that you control random events merely by acquiring more knowledge and consider your abilities to be much better than they are.

50
Q

Define: Self-Control Bias

A

You lack self-discipline and favor immediate gratification over long-term goals.

51
Q

Define: Status Quo Bias

A

You are comfortable with an existing situation, which leads to an unwillingness to make changes, even though the changes are beneficial.

52
Q

Define: Endowment Bias

A

You think an asset you own is worth more than it is because it is yours.

53
Q

Define: Regret Aversion Bias

A

You do nothing out of excess fear that your decisions or actions could be wrong.

54
Q

Define: Affinity Bias

A

You make decisions based on how you believe outcomes will represent your interests and values.

55
Q

T/F: It is not necessary for a planner to be aware of their own biases.

A

FALSE
Planners must be aware of how their own biases can impact the advice they give and the recommendations they make.

56
Q

How can regret aversion be mitigated?

A

Effective communication on the benefits of diversification, the tradeoff of risk/return, and the consequences of not meeting critical long-term investment goals.

57
Q

How can status quo bias be mitigated?

A

By education regarding unfavorable risk/return combinations.

58
Q

How can self-control bias be overcome?

A

By establishing an appropriate investment plan and budgeting to achieve sufficient savings.

59
Q

Define: Money Scripts

A

Unconscious attitudes regarding money, often as a result of childhood experiences, which affect adult perceptions and behaviors.

60
Q

Define: Financial Comfort Zones

A

Represent financial circumstance in which clients are content and unconcerned about their financial well-being.

61
Q

Define: Financial Dependence

A

Dependence on others for income not related to employment, most often creating a fear that the person providing the support will stop the cash flow at any time.

62
Q

Define: Financial Enabling

A

An individual agrees to provide financial assistance to another even though it may put the individual’s own financial well-being at risk.

63
Q

Define: Financial Well-Being

A

The ability to meet current and future financial obligations and the financial freedom of choice to maintain a desired lifestyle.

64
Q

Define: Exterior Finance

A

Relates to clients’ traditional financial matters

65
Q

Define: Interior Finance

A

Clients’ emotional relationship with money

66
Q

_____________ address financial well-being at a deeper level by including both therapeutic and financial expertise that helps clients think, feel, and behave differently with money to improve overall well-being.

A

Financial Therapy

67
Q

T/F: Financial transparency has little effect on trust in relationships.

A

FALSE
Financial transparency promotes honesty and trust in relationships.

68
Q

Why should planners help clients understand that financial transparency is important?

A

A lack of transparency can sabotage the financial planning needed to meet their goal.

69
Q

When is there most likely to be money conflict between partners?

A

When they do not share financial values and goals.

70
Q

T/F: How partners speak to each other is equally as important to what they say to each other during a meeting.

A

TRUE

71
Q

T/F: If there are comparable amounts in couples’ retirement accounts, but they have different risk tolerances, the couple should go with the more conservative partner’s view.

A

FALSE
In this situation, it is preferable for each partner to invest according to their own individual risk tolerance.

72
Q

How can planners help their clients overcome goal incongruence?

A
  • recognize that it is common
  • help partners find common ground
  • encourage open communication between partners
73
Q

If a client has both cognitive biases and emotional biases, which are easier to address?

A

Cognitive Bias

74
Q

What are the different types of financial manipulation?

A
  • financial control
  • financial enabling or financial enmeshment
  • financial abuse
75
Q

Define: Financial Control

A

Inequality among partners in setting financial goals or making decisions regarding money.

76
Q

Define: Financial Enabling (AKA Financial Enmeshment)

A

Most often involves supporting an adult who should not need to be dependent on the enabler.

77
Q

Define: Financial Abuse

A

Controlling an individual’s ability to use, obtain, or possess financial resources.

78
Q

Define: Economic and Resource Approach

A

Clients are assumed to be rational and will change to the most favorable behavior if given the appropriate counseling.

79
Q

Define: Classic Economics Approach

A

Increasing financial resources or reducing financial expenditures results in improved financial outcomes.

80
Q

Define: Strategic Management Approach

A

The client-planner relationship is driven by the clients goals and values. A SWOT analysis is done early in the financial planning process.

81
Q

Define: Cognitive-Behavioral Approach

A

Clients’ attitudes, beliefs, and values influence their behavior. Planners use this approach to substitute negative beliefs that lead to poor financial decisions with positive attitudes, which should result in better financial results.

82
Q

Define: Psychoanalytical Approach

A

Not widely used by planners- is based on the use of psychoanalytic theory.

83
Q

T/F: Planners need to be culturally competent.

A

TRUE
It is important to focus on knowledge that can be learned about clients from other cultures.

84
Q

Define: Interpersonal Communication

A

Communicating one-on-one

85
Q

Define: Verbal Communication

A

Involves language or the use of words, including both written and spoken messaging.

86
Q

Define: Pitch

A

The highness or lowness of one’s voice

87
Q

Define: Tone

A

The inflection of voice or emphasis on certain words and shows attitude

88
Q

Define: Body Language

A

Involves facial expressions, eye contact, gestures, and body posture

89
Q

T/F: Body language impacts how clients receive messages more than any other type of communication.

A

TRUE

90
Q

What is a benefit of eye contact?

A

It can build trust in a client-planner relationship.

91
Q

In regards to spatial communication, how does the maturity of the relationship change the distance between client and planner?

A

The more mature the relationship, the closer the distance between the planners and their clients is considered appropriate.

92
Q

What are the 4 stages of Social Penetration Theory?

A

1- Orientation
2- Exploration
3- Affective Exchange
4- Stable Exchange

93
Q

When does the orientation stage of social penetration theory begin?

A

Before the client and planner’s first meeting- marketing messages, initial telephone calls or emails, and the planner’s office environment all influence how the client becomes familiar with the financial planning process.

94
Q

What is the goal of the orientation stage of social penetration theory?

A

For the client and planner to determine if there is value in developing an ongoing relationship.

95
Q

What happens during the exploration stage of social penetration theory?

A

Clients and planners begin to discuss the financial planning process in more detail and begin to build a trusting relationship.

96
Q

What happens during the affective exchange stage of social penetration theory?

A

The client-planner relationship becomes one of significant trust. It is represented by open disclosure, sincerity, and intimacy.

97
Q

What happens during the stable exchange phase of social penetration theory?

A

The client and planner have developed a consistent and established pattern together- most often represented by open, uninhibited, friendly, and meaningful conversations.

98
Q

Which of these regarding financial counseling is CORRECT?

1- It is a process that helps clients change poor financial behavior through education and guidance.
2- Once clients gain knowledge and resources through financial counseling, they can set realistic short- and long-term goals and make appropriate financial decisions.

A

Both 1 and 2 are correct

99
Q

Ernie sees himself as a consultant to his clients and allows their goals and values to drive his relationships with them. What is his approach to financial counseling?

A

Strategic management approach

100
Q

The approach to financial counseling that believes a client’s attitudes, beliefs, and values influence the client’s behavior and that tries to replace negative beliefs with positive attitudes that should result in better financial results is known as

A

the cognitive-behavioral approach.

CFP Coursework (12 decks)

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