Module 2 Psychology of Financial Planning Flashcards
All of the following statements regarding a client’s attitudes, beliefs, and values are CORRECT except
A)
beliefs are a type of attitude because they reveal the client’s understanding of some aspect of his life.
B)
the planner should pay little attention to a client’s attitudes, beliefs, and values during the financial planning process.
C)
values are attitudes and beliefs for which the client feels strongly.
D)
the client’s attitudes reflect the client’s opinions, values, and wants.
The answer is the planner should pay little attention to a client’s attitudes, beliefs, and values during the financial planning process. The planner must take into account the impact the client’s attitudes, values, and beliefs may have throughout the financial planning process, especially during client-planner communication and when developing and presenting the financial plan.
LO 2.1.1
Which of these statements regarding body language is CORRECT?
Body language involves facial expressions, eye contact, gestures, and body posture.
A planner’s body language has little impact on how clients receive messages.
A)
I only
B)
Both I and II
C)
Neither I nor II
D)
II only
The answer is I only. Statement I is correct. Statement II is incorrect because body language actually impacts how clients receive messages more than any other type of communication.
Which of these statements regarding financial conflict is CORRECT?
A)
To decrease conflict between parents and the adult children they support, it is prudent to have general conversations regarding expectations for each party.
B)
Although it is important to notice nonverbal behaviors, it is more important to pay attention to spoken words.
C)
To identify potential financial conflict, financial planners should place more emphasis on what client partners discuss than how they discuss it.
D)
Married partners with dissimilar risk tolerance levels can present challenges during investment planning; therefore, there must be open and honest discussion between them regarding how joint funds should be invested.
Because married partners with dissimilar risk tolerance levels can present challenges during investment planning, there must be open and honest discussion between them, facilitated by the planner, regarding how joint funds should be invested. Nonverbal behaviors, which are important to notice, are equally important as the spoken word. To identify potential financial conflict, financial planners should give equal importance to what partners say and how they say it. To lessen conflict between parents and adult children they support, it is wise to establish detailed guidelines with the adult children, preferably in a written agreement with detailed terms
LO 2.3.3
Brynlee has a kinesthetic learning style. Which of these statements regarding Brynlee is CORRECT?
She is likely to enjoy physical activities.
She expresses herself with body language.
Graphs, charts, and pictures are useful in presenting information to Brynlee.
A)
II only
B)
I and II
C)
I, II, and III
D)
III only
The answer is I and II. Because Brynlee has a kinesthetic learning style, she is likely to enjoy physical activities. She also would be expected to express herself with body language. Statement III describes individuals with a visual learning style.
The loss aversion theory of behavioral finance states that people tend to
A)
fear losses much more than they value gains.
B)
consider their abilities to be much better than they actually are.
C)
make irrational decisions based on information that should have no influence on the decision at hand.
D)
follow the actions of a larger group, whether rational or not.
The answer is fear losses much more than they value gains. The loss aversion theory of behavioral finance states that people tend to fear losses much more than they value gains. Making irrational decisions based on information that should have no influence on the decision at hand is anchoring. Following the actions of a larger group, whether rational or not, is herding. Considering one’s abilities to be much better than they actually are is overconfidence.
LO 2.2.1
In 2010, the average national gas price was $2.79 per gallon. In 2012, the gas price national average rose to $3.64 per gallon. Responses to gas prices were generally negative. Prices fell to an average per gallon of $3.37 in 2014, and the reaction to the decreased price was positive, even though the price was higher than the 2012 price per gallon of $2.79. This behavior is known as
A)
mental accounting.
B)
anchoring.
C)
herding.
D)
confirmation bias.
The answer is anchoring. When average gas prices rose in 2012 to a $3.64-per-gallon threshold, individuals reset their psychological anchors to that price. As the price declined in 2014 to $3.37, the reaction was positive because it was considered in light of the higher 2012 price.
LO 2.2.1
Which of these statements regarding emotional biases is CORRECT?
Self-control bias occurs when individuals have self-discipline and favor deferred gratification over short-term goals.
Individuals with regret-aversion bias attach undue weight to actions of commission and do not consider actions of omission.
A)
II only
B)
Neither I nor II
C)
I only
D)
Both I and II
The answer is II only. Self-control bias occurs when individuals lack self-discipline and favor immediate gratification over long-term goals. Those with regret-aversion bias attach undue weight to actions of commission (doing something) and do not consider actions of omission (doing nothing).
LO 2.2.1
Which of these best defines the concept of herding?
A)
The tendency of individuals to follow the actions of a larger group, whether rational or not
B)
The tendency of individuals to fear losses much more than they value gains
C)
The tendency of individuals to consider their abilities to be much better than they actually are
D)
The tendency of individuals to make irrational decisions based on information that should have no influence on the decision at hand
The answer is the tendency of individuals to follow the actions of a larger group, whether rational or not. Herding is the tendency to follow the actions of a larger group, whether rational or not. The tendency of individuals to fear losses much more than they value gains is the definition of prospect theory. The tendency of individuals to make irrational decisions based on information that should have no influence on the decision at hand is anchoring. The tendency of individuals to consider their abilities to be much better than they actually are is overconfidence.
LO 2.2.1
Making an irrational decision based on information that should have no influence on the decision at hand is known as
A)
confirmation bias.
B)
mental accounting.
C)
herding.
D)
anchoring.
The answer is anchoring. Making an irrational decision based on information that should have no influence on the decision at hand is known as anchoring. Herding is the tendency to follow the actions of a larger group, whether rational or not. Confirmation bias is the tendency to pay attention to information that supports one’s preconceived opinions while disregarding accurate, unsupported information. Mental accounting involves the tendency of individuals to put their money into separate “accounts” based on the function of these accounts.
LO 2.2.1
Which of these best defines the concept of risk capacity?
A)
The degree to which a client’s financial resources can cushion risks
B)
The client’s tendency to make decisions based on perceived gains rather than perceived losses
C)
The client’s assessment of the magnitude of the risks being traded off
D)
The trade-offs that clients are willing to make between potential risks and rewards
The answer is the degree to which a client’s financial resources can cushion risks. Risk capacity is the degree to which a client’s financial resources can cushion risks. Risk tolerance involves trade-offs that clients are willing to make between potential risks and rewards. The client’s assessment of the magnitude of the risks being traded off is known as risk perception. The client’s tendency to make decisions based on perceived gains rather than perceived losses is described by the loss aversion theory.
When newly acquired information conflicts with pre-existing understanding, people often experience mental discomfort, also known as cognitive dissonance. All of the following are characteristics of cognitive dissonance except
A)
Taking credit for individual successes and blaming others or external influences for failures
B)
Individual changes in attitudes, beliefs, or behaviors to reduce discomfort
C)
Registering only information that appears to affirm an already chosen decision
D)
Rationalizing actions in order to adhere to the original course
The answer is taking credit for individual successes and blaming others or external influences for failures. Self-attribution bias is an ego defense mechanism in which individuals take credit for their successes and either blame others or external influences for failures.
LO 2.2.1
The trade-offs that clients are willing to make between potential risks and rewards are known as
A)
risk capacity.
B)
risk tolerance.
C)
risk avoidance.
D)
risk perception.
The answer is risk tolerance. Risk tolerance refers to the trade-offs that clients are willing to make between potential risks and rewards. Risk perception refers to the client’s assessment of the magnitude of the risks being traded off. Risk capacity is the degree to which a client’s financial resources can cushion risks. Risk avoidance is a method of managing risk.
LO 2.2.1
hich of these statements regarding interpersonal communication between financial planners and their clients are CORRECT?
Mirroring is accomplished by imitating the client’s body language or verbal style.
Effective interpersonal communication involves the application of oral skills only.
Body language can impact how clients receive and interpret messages more than any other type of communication.
Emotional intelligence includes the ability to recognize clients’ expressions and select socially appropriate responses.
A)
I and IV
B)
II and III
C)
I, III, and IV
D)
I, II, and III
The answer is I, III, and IV. Effective interpersonal communication involves the application of both oral and nonverbal skills, such as the effective use of body language.
LO 2.5.1
A planner who wanted to practice physical mirroring would do which of these?
A)
Imitate the client’s word use and tone of voice when talking to the client
B)
Ask the client a question that requires only a “yes” or “no” answer
C)
Answer a client question in a way that guides the client to give more detail
D)
Adopt the client’s body language when talking to the client
The answer is adopt the client’s body language when talking to the client. Adopting the client’s body language is an example of physical mirroring. Imitating the client’s word use and tone of voice is verbal mirroring. Answering a client question in a way that guides the client to give more detail is using a leading response. A question that requires only a “yes” or “no” answer is a closed-ended question.
LO 2.5.2
Which of these statements regarding the pitch and inflection of one’s voice is CORRECT?
A)
Pitch is the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm.
B)
The inflection of one’s voice is the sound quality of highness or lowness.
C)
Voice tone is primarily dependent on the frequency of the sound wave.
D)
Pitch and inflection influence the message conveyed more than the actual spoken words.
The answer is pitch and inflection influence the message conveyed more than the actual spoken words. The pitch and inflection of one’s voice influence the message conveyed more than the actual spoken words. The pitch of one’s voice, not the inflection, is the sound quality of highness or lowness. Pitch is primarily dependent on the frequency of the sound wave. Voice tone, not pitch, is the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm.
LO 2.5.1
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
B)
Classical economics approach
C)
Cognitive-behavioral approach
D)
Economic and resource approach
The answer is strategic management approach. Ernie uses the strategic management approach. In this approach, the client’s goals and values drive the client-planner relationship and the planner serves as a consultant. The cognitive-behavioral approach believes a client’s attitudes, beliefs, and values influence their behavior and tries to replace negative beliefs with positive attitudes that should result in better financial results. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures.
LO 2.4.1
Anthony, a client of yours, considers his investment skills to be much greater than they actually are. He takes credit for any investment decisions that have positive returns but blames the economy when his portfolio does poorly in recent months. Which of the following statements regarding Anthony’s behavior is CORRECT?
A)
It is an example of anchoring.
B)
It represents mental accounting.
C)
It represents overconfidence.
D)
It is an example of confirmation bias.
The answer is it represents overconfidence. Anthony’s behavior is an example of overconfidence, which tends to make him believe his level of ability is much higher than what it is. Confirmation bias is paying attention to information that supports a preconceived opinion and poorly made decision, while disregarding accurate, unsupportive information.
LO 2.2.1
Which of these statements regarding people who have a visual learning style is CORRECT?
They tend to respond to graphs, charts, pictures, and reading information.
They retain information by hearing or speaking.
They express themselves through facial expressions.
They prefer their goals and objectives to be presented as a to-do list in bullet form.
A)
II and III
B)
IV only
C)
I and III
D)
I, III, and IV
The answer is I and III. Statement II is incorrect because people who retain information by hearing or speaking have an auditory learning style. Statement IV is not correct because individuals who prefer goals and objectives to be presented in bullet form exhibit a kinesthetic learning style.
LO 2.1.2
Which of these statements regarding counseling theory is CORRECT?
In the classical economics approach to financial counseling, it is believed that improved financial outcomes can result from increased financial resources or reduced financial expenditures.
Planners using the economic and resource approach assume clients are rational and will change to the most favorable behavior if given the appropriate counseling.
Financial counseling is a process in which the planner helps a client change poor financial behavior by making recommendations to improve financial status.
The cognitive-behavioral approach to financial counseling asserts that clients’ attitudes, beliefs, and values influence their behavior.
A)
II only
B)
I and IV
C)
I, II, and IV
D)
II, III, and IV
The answer is I, II, and IV. The belief in the classical economics approach is that increasing financial resources or reducing financial expenditures results in improved financial outcomes. Rational clients are assumed when using the economic and resource approach. The cognitive-behavioral approach to financial counseling believes that clients’ behaviors are influenced by their attitudes, beliefs, and values. Financial counseling is a process that helps clients change their poor financial behavior through education and guidance. Making recommendations to improve clients’ financial statuses is not part of financial counseling.
LO 2.4.1
Which of these statements regarding open-ended and closed-ended questions is CORRECT?
Planners should use as many closed-ended questions as possible when developing client goals and expectations.
Closed-ended questions facilitate effective communication between the client and planner because they require the client to answer in her own words.
A)
I only
B)
Both I and II
C)
II only
D)
Neither I nor II
The answer is neither I nor II. Statement I is incorrect because planners should use as few closed-ended questions as possible when developing client goals and expectations. These types of questions elicit “yes” or “no” answers and this can restrict communication. Statement II is also incorrect; open-ended questions, which require clients to answer in their own words, also facilitate effective communication between clients and planners. This is not true of closed-ended questions.
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 classical economics approach.
B)
the cognitive-behavioral approach.
C)
the economic and resource approach.
D)
the strategic management approach.
The answer is the cognitive-behavioral approach. This approach to financial counseling is known as the cognitive-behavioral approach. In contrast, the economic and resource approach focuses on obtaining and analyzing quantitative data, such as cash flow, assets, and debt. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures. In the strategic management approach, the client’s goals and values drive the client-planner relationship and the planner serves as a consultant.
LO 2.4.1
A financial planner asked a client the following questions. Which of them are open-ended?
What are your long-term goals?
Do you have a retirement plan through your employer?
How many life insurance policies do you have?
Do your children plan to go to college?
A)
II and IV
B)
I and IV
C)
I only
D)
I, II, III, and IV
The answer is I only. This is an open-ended question because it requires the client to answer in her own words. The remaining questions are closed-ended; they require only a “yes” or “no” answer.
LO 2.1.2
Ellen has $10,000 in a savings account, which she has earmarked for a European vacation next year. Her car recently broke down and requires extensive repairs. Ellen does not want to spend the money in her savings account to make the repairs because she feels that money is for her upcoming vacation. Instead, she withdraws $4,000 from her traditional IRA to make the repairs. She has to pay income tax of $1,120 plus a penalty of $400 on the IRA withdrawal. This is an example of which of the following behaviors?
A)
Mental accounting
B)
Prospect theory
C)
Herding
D)
Confirmation bias
The answer is mental accounting. This is an example of mental accounting because Ellen’s irrational financial decision resulted from mentally putting her money into separate “accounts” based on the function of those accounts. Prospect theory occurs when a person makes a bad decision because she fears losses more than she values gains. Herding occurs when a person follows the actions of a larger group, whether rational or not. Confirmation bias means people tend to pay attention to information that supports their preconceived opinions while disregarding accurate, unsupportive information.
LO 2.2.1
Michael is meeting with his client, Stephanie, to gather the information he needs to develop a financial plan. During the conversation, Michael imitates Stephanie’s gestures and physical positions and uses a similar tone of voice. Which communication skill is Michael using to help develop a relationship of honesty and trust with Stephanie?
Anchoring
Loss aversion theory
Verbal mirroring
Physical mirroring
A)
I, III, and IV
B)
I only
C)
II, III, and IV
D)
III and IV
The answer is III and IV. Michael is using verbal and physical mirroring. Adopting the client’s body language is an example of physical mirroring. Imitating the client’s tone of voice is verbal mirroring. Anchoring and the loss aversion theory are not communication skills. Anchoring involves clients making irrational decisions based on information that should have no influence on the decisions at hand. Loss aversion theory involves investors generally fearing losses much more than they value gains.
LO 2.5.2
Which of these statements regarding verbal mirroring is CORRECT?
In verbal mirroring, the planner imitates the client’s word use, tone of voice, and communication method.
Verbal mirroring includes adopting a similar verbal style to the client.
In verbal mirroring, the planner uses the client’s body language.
The use of verbal mirroring can improve rapport with clients.
A)
III and IV
B)
I and II
C)
I and IV
D)
I, II, and IV
The answer is I, II, and IV. Statement III is incorrect because the use of the client’s body language is physical mirroring.
Which of these statements regarding the classical economics approach to financial counseling is CORRECT?
Clients choose among alternatives based on objectively defined cost-benefit and risk-return tradeoffs.
This approach is based on the use of psychoanalytic theory such as Freudian or Gestalt theory.
This approach believes that increasing financial resources or reducing financial expenditures results in improved financial outcomes.
This approach features the use of a SWOT analysis.
A)
I and III
B)
II, III, and IV
C)
I and II
D)
III and IV
The answer is I and III. Statement II is incorrect; the financial counseling approach that is based on the use of psychoanalytic theory such as Freudian or Gestalt theory is the psychoanalytic approach. Statement IV is incorrect, the strategic management approach features the use of a SWOT analysis.
LO 2.4.1
During a meeting with his financial planner, Jack asks, “Should I be investing in the stock market to meet my savings goals?” The planner answers, “That depends. How do you feel about the possibility that your investment may decline in value?” The planner’s answer is an example of
A)
physical mirroring.
B)
a leading response.
C)
emotional intelligence.
D)
verbal mirroring.
The answer is a leading response. The planner’s answer is a leading response because it guides the client to provide more detail. Physical mirroring is using the client’s body language, and verbal mirroring is imitating the client’s word use, tone of voice, and communication method. Emotional intelligence is the ability to recognize emotional expressions in oneself and others.
LO 2.5.2
The degree to which Zack’s financial resources can cushion risks is known as
A)
emotional intelligence.
B)
risk perception.
C)
risk tolerance.
D)
risk capacity.
The answer is risk capacity. Risk capacity is the degree to which Zack’s financial resources can cushion risks. Risk tolerance refers to the tradeoffs clients are willing to make between potential risks and rewards. Emotional intelligence is the ability to recognize emotional expressions in oneself and the client and to select socially appropriate responses to both the circumstances and the client’s emotions. A client’s assessment of the magnitude of the risks being traded off is known as risk perception.
LO 2.1.1
In making financial decisions, George tends to pay more attention to information that supports his preconceived opinions and poorly made decisions, while disregarding accurate, unsupported information. George’s behavior is an example of
A)
framing effect.
B)
anchoring.
C)
confirmation bias.
D)
herding.
The answer is confirmation bias. George’s behavior is an example of confirmation bias. Herding is following the actions of a larger group, whether rational or not. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. The framing effect states that people are given a frame of reference, a set of beliefs, or values, which they use to interpret facts or conditions as they make decisions.
LO 2.2.1
Which of these statements regarding people who have a visual learning style is CORRECT?
They express themselves through facial expressions.
They understand concepts better using a hands-on approach.
A)
Both I and II
B)
I only
C)
II only
D)
Neither I nor II
The answer is I only. Additionally, visual learners tend to respond to graphs, charts, pictures, and reading information. Statement II is not correct because kinesthetic learners, not visual learners, understand concepts better using a hands-on approach.
LO 2.1.2
Which of these statements regarding interpersonal communication is CORRECT?
Also known as communicating one on one.
Important throughout the financial planning process.
Will ensure that the listener understands and responds effectively to the communicator.
Involves understanding differences when communicating across generations, cultures, and genders.
A)
I and II
B)
I, II, and IV
C)
I, II, III, and IV
D)
II and III
The answer is I, II, III, IV. All the statements are correct. Effective interpersonal communication also involves the understanding and application of oral and nonverbal skills when interacting with clients. Proper use of these skills helps develop a relationship of honesty and trust between financial planners and their clients.
LO 2.5.1
The answer is I, II, III, IV. All the statements are correct. Effective interpersonal communication also involves the understanding and application of oral and nonverbal skills when interacting with clients. Proper use of these skills helps develop a relationship of honesty and trust between financial planners and their clients.
LO 2.5.1
The answer is emotional intelligence. A planner’s ability to recognize emotional expressions in herself and the client and to select socially appropriate responses to the circumstances and the client’s emotions is known as emotional intelligence. Active listening involves paying full attention to what the client is saying and responding by paraphrasing the client’s comments. Mirroring is imitating the client’s body language or verbal style. Body language involves facial expressions, eye contact, gestures, and body posture.
LO 2.5.2
A financial planner is meeting with a client. During a discussion of the client’s estate plan, the client asks, “Would my brother be a good choice as executor of my will?” The planner answers, “What do you feel are your brother’s qualifications to serve as executor?” The planner’s answer is an example of
A)
body language.
B)
emotional intelligence.
C)
a leading response.
D)
verbal mirroring.
C a leading response
When making financial decisions, Bruce tends to pay more attention to information that supports his preconceived opinions and poorly made decisions, while disregarding accurate, unsupported information. Bruce’s behavior is an example of
A)
anchoring.
B)
confirmation bias.
C)
framing bias.
D)
herding.
The answer is confirmation bias. Bruce’s behavior illustrates confirmation bias. The framing effect states that people are given a frame of reference, a set of beliefs or values, which they use to interpret facts or conditions as they make decisions. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. Herding is following the actions of a larger group, whether rational or not.
LO 2.2.1
Greg assumes that his clients are rational and will change to the most favorable behavior if given the appropriate counseling. He sees himself as the agent of change and focuses on obtaining and analyzing quantitative data such as cash flow, assets, and debt. Greg’s approach to financial counseling is known as the
A)
classical economics approach.
B)
strategic management approach.
C)
cognitive-behavioral approach.
D)
economic and resource approach.
The answer is economic and resource approach. Greg’s approach is the economic and resource approach. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures. The cognitive-behavioral approach believes a client’s attitudes, beliefs, and values influence their behavior and tries to replace negative beliefs with positive attitudes that should result in better financial results. In the strategic management approach, the client’s goals and values drive the client-planner relationship and the planner serves as a consultant.
LO 2.4.1
