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

The disposition effect, rooted in prospect theory, leads investors to realize gains quickly while deferring losses to avoid the psychological pain of admitting a mistake.

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

Prospect theory finds that the pain of losing a dollar is roughly twice as powerful as the pleasure of gaining a dollar, demonstrating loss aversion.

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

Anchoring bias causes the investor to fixate on the original purchase price ($80) as a reference point, making it emotionally difficult to accept the current lower value.

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

Showing a client empirical evidence of how their predictions or expectations compared to actual outcomes is an evidence-based approach to reducing overconfidence.

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

Mental accounting causes people to create separate psychological 'accounts' for money, leading to irrational decisions such as treating a tax refund as 'free money.'

(CIMA) Certified Investment Management Analyst Practice Test

(CIMA) Certified Investment Management Analyst Practice Test

CIMA Behavioral Finance and Client Management