Lecture 2 - Wealth, Cash And Behaviour

Question 1

Why plan

Answer 1

To be able to afford a holiday
Pension
Buy a car
Prevent house from being re-possessed

Question 2

The financially ok

Answer 2

To make the best use of income
Reduce bills
Improve their pension

Question 3

Financially challenged

Answer 3

To survive
Pay debts
Stop bailiffs from repossessing belongings
Stop house being repossessed or being evicted from rented property

Question 4

Risk tolerance

Answer 4

Depends on: 
Times of life 
Circumstances and spare money 
Personal attitude 
Behaviour vs logic

Question 5

Rationality

Answer 5

Personal limitations:

Constraints - money, time and understanding
Risk - accept, reduce, avoid, transfer
Bias - marketing, behaviour of others, or the past
Cultural preferences
Personality (patience)

Question 6

Personal investment decisions can be affected by

Answer 6

Unrelated emotions and mood

When you’re in a good mood, you’ll be more optimistic about the future than when you’re in a bad mood

Question 7

Implies - behavioural finance

Answer 7

Tendency to be optimistic when evaluating an investment
Higher trust in the financial services industry
More likely to make risky investments

Question 8

Prospect theory

Answer 8

Most developed theory in behavioural finance.
3 key elements

• perceived probabilities are subject to bias/ tendencies to exaggerate small and large probabilities
• investors are more concerned about gains or losses than levels of wealth
• pain of losses is 2.25 times more intense than pleasure from gains

Question 9

Advisor

Answer 9

Risk is objective 
Unemotional 
Objective benchmark 
Assumes constant risk 
Finances understood 
Portfolio focus 
Providers trusted 
Regulators trusted

Question 10

Individual

Answer 10

Risk is subjective 
Emotional 
Subjective benchmarks 
Variable risk aversion 
Limited understanding 
Individual focus 
Providers not trusted 
Regulators not trusted