Behavioral Finance Flashcards
7 cards from real CWS practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Behavioral Finance flashcards as text
A CWS professional uses 'framing' to present a client's portfolio return as '+5% above the benchmark' rather than as an absolute loss year. This illustrates which behavioral finance concept?
Answer: Framing effect
The framing effect shows that how information is presented significantly influences decision-making; the same outcome can be perceived very differently depending on whether it is framed as a gain or a loss.
Herding behavior in financial markets is most likely to cause:
Answer: Asset price bubbles and subsequent crashes
Herding, the tendency to mimic the investment decisions of a larger group, can inflate asset prices into bubbles as everyone buys the same assets, and precipitate crashes when the trend reverses.
Which behavioral bias could cause a client to overestimate the likelihood of a market crash after reading extensive news coverage of a recent downturn?
Answer: Availability bias
Availability bias causes people to judge the probability of events based on how easily examples come to mind; heavy media coverage of a crash makes the memory vivid and accessible, leading to overestimation of its future likelihood.
A client judges an investment fund as high-quality because its recent brochure resembles those of top-performing funds, even without reviewing actual performance data. This is an example of:
Answer: Representativeness heuristic
The representativeness heuristic involves judging the probability that something belongs to a category based on how much it resembles a prototype, ignoring base rate information such as actual fund performance statistics.
In the context of a client review, 'regret avoidance' most likely leads to:
Answer: Holding a poor-performing asset to avoid the regret of realizing a loss
Regret avoidance causes investors to delay selling losing positions because realizing the loss makes the mistake concrete and psychologically painful, often compounding the financial damage.
Which of the following strategies is MOST effective for a CWS professional to counter a client's confirmation bias?
Answer: Actively seeking out and presenting disconfirming evidence regarding the client's investment view
Counteracting confirmation bias requires deliberately surfacing contradictory evidence so that the client's view is tested against opposing data rather than simply reinforced by selectively gathered information.
Which statement BEST describes the concept of 'bounded rationality' introduced by Herbert Simon?
Answer: Decision-makers are limited by available information, cognitive limitations, and time, leading to 'satisficing' rather than optimizing
Bounded rationality holds that human decision-making is rational only within the limits imposed by available information, cognitive capacity, and time constraints, causing people to seek 'good enough' solutions rather than optimal ones.