Lesson 2 Quiz Questions Flashcards
The Cognitive-Behavioral School of Thought
All behavior is subject to the principles of reinforcement by environmental conditions
The Developmental School of Thought
An overall aspiration to correct earlier disrupted development to foster change in the client’s behavior. Has it origin in and was influenced by Freudian psychoanalytic theory.
The Humanistic School of Thought
A philosophical stance that humankind is basically good and people have the inherent capability of self-direction and growth under the right circumstances.
How does bias affect a rational investor as described in traditional finance?
In traditional finance theory, a rational investor is not affected by bias.
Principles of the Modern Portfolio Theory/Traditional Finance
- Investors are Rational
- Markets are Efficient
- The Mean-Variance Portfolio Theory Governs
- Returns are Determined by Risk (Beta)
Risk Capacity
The degree of risk that a client can or should take
Risk Tolerance
The degree of risk that a client feels comfortable taking
Types of Cognitive Biases
- Anchoring
- Confirmation Bias
- Gambler’s Fallacy
- Herding
- Hindsight Bias
- Overconfidence
- Overreaction
- Prospect Theory
Anchoring
Attaching or anchoring one’s thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question.
Confirmation Bias
People tend to filter information and focus on information supporting their opinions.
Gambler’s Fallacy
Misconceptions around probabilities can lead to faulty predictions as to the occurrences of events.
Herding
Mimicking the actions or decisions of a larger group, even though the individual may not necessarily have made the same choice.
Hindsight Basis
Looking back upon an adverse event and changing it retrospectively.
Overconfidence
Concerns an investor that listens mostly to himself or herself.
Overreaction
Using emotion when making decisions in the stock market.
