CIMA Behavioral Finance and Client Management

Question 1

Which behavioral bias causes investors to hold losing positions too long and sell winning positions too early?

Accepted Answer

Disposition effect

Answer

Overconfidence bias

Answer

Anchoring bias

Answer

Representativeness heuristic

Question 2

Prospect theory, developed by Kahneman and Tversky, differs from expected utility theory primarily because it shows that:

Accepted Answer

Investors are more sensitive to losses than to equivalent gains

Answer

Investors always maximize expected utility in decision-making

Answer

Risk tolerance is constant regardless of the reference point

Answer

Investors prefer variance over expected value in all cases

Question 3

A client refuses to sell a stock at a loss because they paid $80/share and it is now $50/share. This behavior is most closely associated with:

Accepted Answer

Anchoring bias

Answer

Herding behavior

Answer

Mental accounting

Answer

Framing effect

Question 4

In a client relationship management context, a CIMA professional addressing a client's overconfidence bias should:

Accepted Answer

Present objective historical data showing actual versus expected performance

Answer

Agree with the client's assessment to maintain the relationship

Answer

Recommend only high-risk investments to match client confidence

Answer

Avoid discussing performance benchmarks altogether

Question 5

Mental accounting, a concept from behavioral finance, refers to the tendency of investors to:

Accepted Answer

Treat money differently based on its source or intended use

Answer

Allocate exactly equal weights to all asset classes

Answer

Track only realized gains and ignore unrealized losses

Answer

Calculate portfolio returns using mental arithmetic rather than software

Question 6

Which behavioral concept explains why investors tend to follow the investment decisions of the crowd, often contributing to market bubbles?

Accepted Answer

Herding behavior

Answer

Status quo bias

Answer

Recency bias

Answer

Illusion of control