CWS Behavioral Finance 1

Question 1

Which behavioral bias causes investors to hold losing investments too long while selling winning investments too quickly?

Accepted Answer

Disposition effect

Answer

The disposition effect describes the tendency of investors to sell assets that have increased in value while keeping assets that have declined in value, often leading to suboptimal tax and portfolio outcomes.

Question 2

A wealth strategist notices a client believes their investment portfolio will outperform the market simply because they selected the stocks themselves. This best illustrates:

Accepted Answer

Overconfidence bias

Answer

Overconfidence bias occurs when investors overestimate their own ability to select investments or predict market movements, often leading to excessive trading and underdiversification.

Question 3

Mental accounting, as described by Richard Thaler, refers to:

Accepted Answer

The tendency to assign different values to money based on its source or intended use

Answer

Mental accounting is the cognitive tendency to treat money differently depending on where it came from or how it is earmarked, such as treating a tax refund as 'free money' to be spent rather than saved.

Question 4

Which concept, central to prospect theory, explains why investors feel the pain of a $10,000 loss more intensely than the pleasure of a $10,000 gain?

Accepted Answer

Loss aversion

Answer

Loss aversion, a core principle of Kahneman and Tversky's prospect theory, holds that losses are felt approximately twice as powerfully as equivalent gains, causing risk-averse behavior in the domain of gains and risk-seeking behavior in the domain of losses.

Question 5

A client refuses to change their investment allocation because it is the same allocation they have had for years, despite changing market conditions. This behavior is most consistent with:

Accepted Answer

Status quo bias

Answer

Status quo bias is the preference for the current state of affairs, causing clients to resist changes even when a rebalancing or reallocation would be in their financial interest.

CWS - Certified Wealth Strategist Practice Test

CWS - Certified Wealth Strategist Practice Test

CWS Behavioral Finance 1