LO 2.1.2: Determine the ways in which a client’s emotional biases affect the selection of a client’s goals and understanding.

Question 1

Emotional biases

Answer 1

stem from feelings, impulses, or intuition.

Question 2

How are emotional biases different from cognitive biases

Answer 2

not related to conscious thought

Question 3

Why is it hard to overcome emotional bias

Answer 3

it’s hard to change how a person feels about a thing; you are entitled to your feeling.

Question 4

Biases have both cognitive and emotional elements, how to help mitigate

Answer 4

It’s more likely we’re going to succeed by focusing on cognitive biases than emotional biases.

Question 5

Prospect theory

Answer 5

Investors fear losses more than they value gains

* They will often choose the smaller of two potential gains if it avoids a certain loss

Question 6

Loss Aversion Theory

Answer 6

Loss aversion theory involves clients fearing loss much more than they value gains, and prefer avoiding losses to acquiring same amount in gains.

• Can lead out of the framing effect
• Related to prospect theory, as well (fear losses more than value gains)

Question 7

Overconfidence

Answer 7

Overconfidence leads clients to believe they can control random events merely by acquiring more knowledge and consider their abilities to be much better than they actually are.

• External influences are demed responsible for any negative outcomes.
• Often associated with an illusion of control bias

Question 8

Self-control bias

Answer 8

Self-control bias occurs when individuals lack self-discipline and favor immeidate gratification over long-term goals.
* People can control their cash flow by saving and investing for the long term — this is a hurdle in achieving financial success

Question 9

Status quo bias

Answer 9

Status quo bias occurs when comfort with an existing situation leads to an unwillingess to make changes, even though the change is likely beneficial.

Question 10

Regret-aversion bias

Answer 10

Regret aversion bias occurs when indivdiuals do nothing out of excess fear that decisions or actions could be wrong.
* attach undue weight to actions of commission (doing something) and do not consider actions of ommission (doing nothing) p. 66

Question 11

Endowment bias

Answer 11

• Endowment bias occurs when an asset is felt to be special and more vlauable simply becasue it is already owned.
• Once individuals own assets, they irrationally overvalue them, regardless of the assets’ actual value.
• e.g. Inheritance: may be reluctant to sell bc imbuing it w/more emotion than they should

Question 12

Affinity bias

Answer 12

Affinity bias refers to the tendency to make decision based on how individuals believe the outcomes will represent their interest and values.

Question 13

How can clients’ emotional biases affect the selection of their goals and understanding

Answer 13

sometimes you have to point out to clients that they’re making decisions based on emotion, rather than on what’s logical or what’s rational.

• emotions are often engaged in financial decisions
• be aware and help clients understand that aspect of their decision-making.