Module 2- psychology of financial planning

Question 1

Behavioral finance

Answer 1

Study of cognitive psychology and economics to understand why people act irrationally during financial decision-making process. Attempt to explain peoples biases when making decisions regarding money

Question 2

Risk tolerance

Answer 2

Trade-off that clients are willing to make between potential risks and rewards with some probability of negative outcomes

Question 3

Risk preference

Answer 3

Attitude a client has towards financial risks, personal trait

Question 4

Risk perception

Answer 4

Subjective judgment, people make when asked to describe an evaluate the risk of a financial decision

Question 5

Risk capacity

Answer 5

Degree to which a client financial resources can mitigate risks

Question 6

Risk literacy

Answer 6

May impact the way they evaluate risks, ability of a client to comprehend and act upon information regarding financial risks

Question 7

Psychological profile

Answer 7

Understanding, unique profile of a client to allow the planner to accurately predict the way a client will perceive and judge recommendations

Question 8

Attitudes

Answer 8

Reflect a person’s opinions, values and wants

Question 9

Beliefs

Answer 9

Type of attitude, revealing the understanding of some aspect of a persons life

Question 10

Values

Answer 10

Attitudes and beliefs, for which a person feels strongly, what someone believes to be right

Question 11

Illusion of control bias

Answer 11

When clients believe they can control or affect outcomes, when they actually cannot associated with overconfidence bias

Question 12

Overconfidence

Answer 12

Believe abilities to be much better than they are

Question 13

Money illusion

Answer 13

Misunderstanding people have relating nominal rates or prices with real (inflation adjusted)rates. Tendency to think a dollar has the same value today tomorrow and in the future

Question 14

Conservatism bias

Answer 14

Originally form a rational view, but failed to change with new information- unwilling to update view.

Question 15

Hindsight bias

Answer 15

Selective memory of past events, a tendency to remember their correct views, and forget the errors. over estimate what could have been known

Question 16

Confirmation bias

Answer 16

Look for new information to support an existing view

Question 17

Representative bias

Answer 17

Tendency to recall a past experience similar to a present situation, and assume they are both alike

Question 18

Mental accounting

Answer 18

Money, jar mentality
Mentally, putting money into separate accounts, based on the purpose of each account

Question 19

Cognitive dissonance

Answer 19

Mental discomfort when new information conflicts with pre-existing understanding. often change attitudes and beliefs and behaviors to reduce discomfort

Question 20

Self attribution bias

Answer 20

Take credit for their successes and blame others for failures

Question 21

Anchoring

Answer 21

Making irrational decisions based on information that should have no influence

Question 22

Outcome bias

Answer 22

Taking a course of action based on outcomes from prior events

Question 23

Framing bias

Answer 23

Process and response information based on the manner in which it is presented

Question 24

Recency bias

Answer 24

New information, which is more recent, is considered more important and valuable than less current information

Question 25

Emotional biases

Answer 25

Loss aversion
Overconfidence
Self-control, bias
Status quo, bias, and endowment bias
Regret, aversion, bias
Affinity bias

Question 26

Loss aversion

Answer 26

You fear loss as much more than you value gains, and you prefer avoiding losses to acquiring the same amount of gains

Question 27

Overconfidence

Answer 27

Believe that you can control a random events merely by acquiring more knowledge

Question 28

Self-control, bias

Answer 28

Lack self discipline and favor, immediate gratification over long-term goals

Question 29

Status quo bias

Answer 29

Comfortable with an existing situation, leading to unwillingness to make changes, even if beneficial

Question 30

Endowment bias

Answer 30

Belief and asset you own is worth more because it is yours

Question 31

Regret a version bias

Answer 31

Do nothing out of excess fear, that your decisions or actions could be wrong

Question 32

Affinity bias

Answer 32

Make decisions based on how you believe the outcomes will represent your interests and values