CWS Behavioral Finance 3

Question 1

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?

Accepted Answer

Familiarity bias

Answer

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.

Question 2

Which of the following wealth management techniques is MOST directly designed to leverage positive behavioral tendencies rather than trying to eliminate biases entirely?

Accepted Answer

Automatic enrollment and escalation in savings plans

Answer

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.

Question 3

According to prospect theory, how do investors typically value outcomes?

Accepted Answer

Relative to a reference point, with losses weighted more heavily than equivalent gains

Answer

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.

Question 4

A CWS professional who documents investment policy statements (IPS) and holds clients to pre-committed strategies is PRIMARILY helping clients overcome:

Accepted Answer

Emotional decision-making driven by short-term market movements

Answer

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.

Question 5

A client recalls only their best investment decisions when evaluating their overall portfolio performance. This selective memory is BEST described as:

Accepted Answer

Self-attribution bias

Answer

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.

CWS - Certified Wealth Strategist Practice Test

CWS - Certified Wealth Strategist Practice Test

CWS Behavioral Finance 3