Module 2

Question 1

Illusion of Control Bias

Answer 1

when clients (erroneously) believe that they can control or affect outcomes of things that they cannot. Detection starts with realizing that investment results are probabilistic

Question 2

Money illusion

Answer 2

not factoring in inflation. The misunderstanding people have in relating nominal rates or process with real rates.

Question 3

Conservatism bias

Answer 3

when individuals form a rational view but fails to update said view based on new information that is received

Question 4

Hindsight bias

Answer 4

a selective memory of past events, actions or what was known in the past. Clients have a tendency to remember correct views and forget the errors

Question 5

Confirmation bias

Answer 5

when an individual looks for new information or distort new information to support an existing view. This can lead to considering positive and ignoring negative information, or under-diversifying as you believe your ideas are correct. You might also concentrate in the stock of your employer as you believe that you have more information than those who are not employed by that company.

Question 6

Representativeness

Answer 6

the tendency to recall a past experience like the present decision-making situation and assume one is like the other. For example, you might feel overly negative about a stock that has fallen. There are two forms

Question 7

Base rate neglect

Answer 7

when the base rate of the classification is not adequately considered. Taken a classification as 100%, with no consideration that it could be wrong

Question 8

Sample size neglect

Answer 8

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

Question 9

Cognitive Dissonance

Answer 9

when newly acquired information conflicts with pre-existing understanding, people often experience mental discomfort

Question 10

Selective perception

Answer 10

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

Question 11

Selective decision¬-making

Answer 11

when commitment to an original decision course is high

Question 12

Self¬-attribution bias

Answer 12

taking credit for successes and blaming others for failures

Question 13

Self-enhancing bias

Answer 13

the tendency to claim an irrational degree of credit for successes

Question 14

Self-protecting bias

Answer 14

the irrational denial of responsibility for failure

Question 15

Anchoring

Answer 15

individuals making irrational decisions based on information that should have no influence on decisions at hand

Question 16

Outcome bias

Answer 16

tendency to take a course of action based on the outcome of prior events. An investor may choose a particular

Question 17

Framing bias

Answer 17

people are given a frame of reference as they make decisions. They respond to information based on the manner in which it is presented

Question 18

Recency bias

Answer 18

new information is considered more important and valuable than less current information. This is also related to herding, wherein investors will trade in the direction of securities, possibly even contrary to the information they have available.