Behavioral Finance and Client Management Flashcards
6 cards from real CIMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Behavioral Finance and Client Management flashcards as text
Which behavioral bias causes investors to hold losing positions too long and sell winning positions too early?
Answer: Disposition effect
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.
Prospect theory, developed by Kahneman and Tversky, differs from expected utility theory primarily because it shows that:
Answer: Investors are more sensitive to losses than to equivalent gains
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.
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:
Answer: Anchoring bias
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.
In a client relationship management context, a CIMA professional addressing a client's overconfidence bias should:
Answer: Present objective historical data showing actual versus expected performance
Showing a client empirical evidence of how their predictions or expectations compared to actual outcomes is an evidence-based approach to reducing overconfidence.
Mental accounting, a concept from behavioral finance, refers to the tendency of investors to:
Answer: Treat money differently based on its source or intended use
Mental accounting causes people to create separate psychological 'accounts' for money, leading to irrational decisions such as treating a tax refund as 'free money.'
Which behavioral concept explains why investors tend to follow the investment decisions of the crowd, often contributing to market bubbles?
Answer: Herding behavior
Herding behavior occurs when investors mimic the actions of others rather than conducting independent analysis, amplifying market trends and contributing to bubbles.