Psychology Of Financial Planning Psychology of financial planning Flashcards
Client actions are organized into what two groups?
Cognitive errors and emotional biases
What are cognitive errors?
Due to faulty reasoning
Lack of understanding of proper statistical analysis techniques, information, processing mistakes, memory errors
Often can be corrected or mitigated with better training or information
What are the 13 cognitive errors?
- Illusion of control bias
- Conservatism bias
- Hindsight bias.
- Confirmation bias.
- Representativeness bias
- Mental accounting.
- Self attribution bias.
- Adjustment.
- Outcome bias.
- Anchoring.
- Framing bias.
- Recency bias.
- Herding
What is the illusion of control bias?
Think they can influence outcomes when they cannot
What is conservatism bias?
Initially assume a rational view, but failed to change that view as new information becomes available
Do not adjust to new information
What is hindsight bias?
Selective memory of past events, actions
Tend to remember their correct views forget the errors
What is confirmation bias?
Market participants look for new information to support an existing view
Become overly attached to some investments, only bring up information favorable to the holding
What is representativeness?
Believe the past will persist
New information is classified based on previous experiences
What is mental accounting?
Also known as money jar mentality
Tendency of individuals to put their money into separate accounts, based on the function of these accounts
What is self attribution bias?
Ego defense mechanism, having to admit making a mistake
What is anchoring?
Irrational decisions, based on information that should have no influence on the decisions at hand
Risky when people know a little about the product being purchased, or service, being delivered, or investment being made
What is adjustment?
Clinging on to an initial estimate, not adjusting for new information
What is outcome bias?
Tendency for individuals to take a course of action based on the outcomes of prior events
What is framing bias?
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
What is recency bias?
Recent information is given more important because it is most vividly remembered
What is herding?
Investors trade in the same direction for the same securities and possibly trade contrary to the information they have available
What are emotional biases?
Not related to conscious thought stand from feelings, impulses, or intuition
More difficult to overcome may have to be accommodated
What are emotional biases?
Not related to conscious thought stand from feelings, impulses, or intuition
More difficult to overcome may have to be accommodated
What are the eight emotional bias theories?
- Prospect theory.
- Loss aversion theory
- Over confidence.
- Self control bias
- Status quo bias.
- Endowment bias.
- Regret aversion bias
- Affinity bias.
What is prospect theory?
Having a loss is much more than valuing gains
Often choose the smaller of two potential gains if it avoids a sure loss
What is loss aversion theory?
Involves clients, valuing gains and losses differently
Makes decisions based on perceive Gaines, rather than perceived losses
What is overconfidence?
Believe that they can control random events, merely by acquiring more knowledge, and consider their abilities to be much better than they are
What is self control bias?
Lack self discipline and favor, immediate gratification over long-term goals
What is status quo bias?
Comfort with an existing situation leads to an unwillingness to make changes
What is endowment bias?
Asset is deemed special and more valuable, simply because it is already owned
What is regret aversion bias?
Market participants, do nothing out of excess fear that actions could be wrong
Attach undo wait to actions of commissions (doing something) do not consider actions of omission (doing nothing) sense of regret and pain, stronger for acts of commission
What is affinity bias?
Tendency to favor things that one can identify with emotionally because they are familiar
During meetings, what type of behaviors should planners be aware of between marriages and family members?
Arguing during sessions
Discussing financial disagreements at home
One partner, speaking more frequently than the other
One partner, interrupting, and or speaking over the other
Behaving in a way that represents nonverbal behaviors related to conflict, such as crossing, arms, rolling eyes sitting far from one another, no iContact between partners
Criticizing or speaking sarcastically to the other partner
What are the four stages of the social penetration theory?
Stage one orientation
Stage two exploration
Stage three affective exchange
Stage four stable exchange
What happens in each of the four stages of the social penetration theory?
Stage one orientation begins before the first meeting and then in initial communication
Stage stage two exploration begin to discuss the financial planning process in more detail
Stage three affective exchange planner client relationship because one of significant trust
Stage for stable exchange clients and planners have developed a consistent and established pattern together
What are non-directive counseling skills?
Encourage clients to reflect, and share their goals, beliefs, traditions, cultural background, feelings, and concerns in a thorough and open manner
What are the four nondirective counseling skills?
- Clarification, used to ensure the planner understands the client.
- Paraphrasing. Planners use their words to express something that was said by their client.
- Summarizing, brief outline of a discussion call Al, the planner to verify that they are capturing clients, Keagle‘s values and intentions at that point in the dialogue.
- Reflection mirroring the emotional state or mood of the client in words build rapport, the client fosters a relationship of trust.
Non-directive counseling skills
Paraphrasing
This contributes to helpful communication in what three ways?
Ensures that they have heard their clients correctly
Clients are given the opportunity to self reflect
Clients can provide correction if the planners paraphrased it accurately
Non-directive counseling skills
Paraphrasing
What two types of paraphrase are there and how are they used?
Restatement paraphrase, planner essentially repeats what the client says in another way, limited value, because it’s simply just to clarify what the client has said.
Second type meeting paraphrase, restate client statements in the context of what the planner believes the clients have in mind.
What is directive counseling skills?
Financial planner centered or financial planner directed planner, takes the lead in choosing how the conversation progresses with employing directive, communication skills
What is directive counseling skills?
Financial planner centered or financial planner directed planner, takes the lead in choosing how the conversation progresses with employing directive, communication skills
What are the eight directive counseling skills?
- Interpretation.
- Reframing.
- Explanation.
- Advice.
- Suggestion.
- Urging.
- Confrontation.
- Ultimatum.
Directive counseling skills
What is the interpretation skill?
Helps client understand their situation’s using financial terms and principles
Directive counseling skills
What is reframing?
Helps clients shift their perspectives by considering the circumstances, feelings, or thoughts from another viewpoint
A directive counseling skills
What is explanation?
A descriptive statement used to make something more straightforward or understandable
Are directive counseling skills
What is the advice skill?
Giving directions to a client, clients may benefit from giving advice with permission
Are directive counseling skills
What is the advice skill?
Giving directions to a client, clients may benefit from giving advice with permission
Directive counseling skills
What is the suggestion skill?
Different from advice because it includes helping clients choose a course of action through their own initiative
Directive counseling skills
What is the urging skill?
Prompting the client to take immediate action, typically practiced in crisis, should be used sparingly
Directive counseling skills
What is the confrontation skill?
Planners directly, share their disagreement with their client
Utilized when there is high trust already developed
Used when a client needs to be prompted into action
Can backfire
Disagreement does not need to be forceful or hurtful
Directive counseling skills
What is the confrontation skill?
Planners directly, share their disagreement with their client
Utilized when there is high trust already developed
Used when a client needs to be prompted into action
Can backfire
Disagreement does not need to be forceful or hurtful
Directive counseling skills
What is the ultimatum skill?
Giving a client, the choice to change behavior immediately or the client planer relationship will end, usually clients behavior becomes dysfunctional
What are the six general principles of affective communication?
Emotional intelligence
Active listening
Leading responses
Body language
Context
Mirroring
What is emotional intelligence?
Recognize emotional expressions in oneself and the client
What is active listening?
Pay full attention to what Client says, paraphrasing the client comments for full understanding
What is leading responses?
Guide the client to give more detailed responses meeting of the minds more likely
What is body language?
Involves facial expressions, gestures, body posture; impacts how messages are received more than any other type of communication
What is the effective communication of context?
Past history or conditions that exist during communication should be considered by the planner
Includes clients, attitudes, values, biases, cultural, influences, age and expertise
Planners recognition of his own attitudes, values, biases, behaviors, and the impact they may have on any recommendations made for clients as equally important
What is the effective communication of mirroring?
Imitating clients gestures, physical positions, or by using a similar verbal style
What are the three learning styles?
Visual
Auditory
Kinesthetic
How do people learn that are visual?
Respond to visual objects, such as graphs, charts, pictures, and reading information
How do people learn that are auditory?
They retain information by hearing or speaking most effective. His clients needs priorities and goals are discussed before being reduced to writing.
How do people learn that are kinesthetic in learning?
Learning styles, understand concepts, better using a hands-on approach. Examples include writing, goals, and objectives with bullet points as they are formulated engages clients with this type of learning style.
Financial counseling
What is the economic and resource approach to financial planning?
The planner assumes that their clients will be rational and will change if given the appropriate counseling your financial planner takes on the responsibility of guiding change to focus on using this approach is to obtain and analyze quantitative data
Financial counseling
What is the classical economics approach?
Clients choose among alternatives based on objectively defined cost benefit and risk return trade-offs
Increasing financial resources or reducing financial expenditures results in improved financial outcomes
Financial counseling
What is the strategic management approach?
A clients goals and values drive the client planner relationship
Planner conducts SWOT analysis, which identifies strengths, weaknesses, opportunities, and threats. It is done early in the financial process, and the planner serves as a consultant.
Financial counseling
What is the cognitive behavioral approach?
Clients attitudes, beliefs and values influenced their behavior, planners using this approach attempt to substitute negative beliefs that lead to poor financial decisions with positive attitude, which should result in better financial results
