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 client insists on keeping a significant portion of their portfolio in their former employer's stock despite diversification advice. Which behavioral bias BEST explains this?
Answer: Familiarity bias
Familiarity bias leads investors to favor investments they know well, such as a former employer's stock, over more diversified alternatives, creating concentration risk they may not fully appreciate.
Which of the following wealth management techniques is MOST directly designed to leverage positive behavioral tendencies rather than trying to eliminate biases entirely?
Answer: Automatic enrollment and escalation in savings plans
Automatic enrollment and contribution escalation use the status quo bias and inertia constructively by making saving the default behavior, improving long-term wealth accumulation without requiring clients to actively override a bias.
According to prospect theory, how do investors typically value outcomes?
Answer: Relative to a reference point, with losses weighted more heavily than equivalent gains
Prospect theory by Kahneman and Tversky establishes that investors evaluate outcomes relative to a reference point and that the value function is steeper for losses than for gains, reflecting loss aversion.
A CWS professional who documents investment policy statements (IPS) and holds clients to pre-committed strategies is PRIMARILY helping clients overcome:
Answer: Emotional decision-making driven by short-term market movements
A pre-committed IPS acts as a behavioral guardrail, reducing the likelihood that clients will make impulsive, emotion-driven decisions in response to short-term market volatility.
A client recalls only their best investment decisions when evaluating their overall portfolio performance. This selective memory is BEST described as:
Answer: Self-attribution bias
Self-attribution bias causes individuals to attribute successes to their own skill while blaming failures on external factors, leading to an inflated self-assessment and potentially excessive risk-taking.
Which of the following is the BEST example of the 'endowment effect' in wealth management?
Answer: A client refuses to sell an inherited stock at fair market value because they perceive it as worth more simply because they own it
The endowment effect describes the tendency to overvalue items one already owns; in wealth management, this commonly manifests as reluctance to sell inherited or long-held securities at their objective market value.
When constructing a behaviorally aware wealth management plan, which approach BEST aligns client portfolios with their psychological needs while maintaining financial discipline?
Answer: Segmenting the portfolio into goal-based 'buckets' that address both safety needs and growth aspirations
Goal-based or 'bucket' portfolio strategies address behavioral tendencies by separating assets according to time horizon and purpose, reducing the emotional impact of volatility on long-term growth assets while providing psychological comfort through a stable short-term bucket.