FFC Behavioral Finance and Coaching Techniques 2 — Questions and Answers
Question 1: A client consistently sells winning investments too early while holding losing ones too long. This behavior is best explained by which bias?
- Recency bias
- Disposition effect (Correct answer)
- Anchoring bias
- Framing effect
Correct answer: Disposition effect
The disposition effect describes the tendency to sell winners prematurely and hold losers too long due to loss aversion.
Question 2: When coaching a client who attributes all past investment successes to their own skill but blames bad luck for losses, a coach should address which cognitive error?
- Mental accounting
- Self-attribution bias (Correct answer)
- Herding behavior
- Status quo bias
Correct answer: Self-attribution bias
Self-attribution bias causes people to credit themselves for successes and external factors for failures, distorting accurate self-assessment.
Question 3: Which motivational interviewing technique involves reflecting back what a client said using slightly different words to deepen understanding?
- Affirmation
- Summarizing
- Reflective listening (Correct answer)
- Open-ended questioning
Correct answer: Reflective listening
Reflective listening involves paraphrasing or restating a client's words to demonstrate understanding and encourage deeper exploration.
Question 4: A client refuses to move emergency funds out of a low-yield savings account despite better options because 'that's always where we've kept it.' This illustrates:
- Loss aversion
- Recency bias
- Status quo bias (Correct answer)
- Endowment effect
Correct answer: Status quo bias
Status quo bias is the preference for the current state of affairs, making people resistant to change even when alternatives are objectively better.
Question 5: In behavioral coaching, what does the term 'change talk' refer to?
- A client's verbal resistance to financial advice
- Client statements that favor movement toward change (Correct answer)
- A coach's scripted persuasion techniques
- The language used to explain investment products
Correct answer: Client statements that favor movement toward change
Change talk refers to client statements expressing desire, ability, reasons, or commitment to change, which motivational interviewing seeks to elicit.
Question 6: Which heuristic causes investors to give more weight to recent events than to long-term historical data when making financial decisions?
- Availability heuristic
- Representative heuristic
- Recency bias (Correct answer)
- Affect heuristic
Correct answer: Recency bias
Recency bias leads investors to overweight recent market performance when forecasting future returns, often leading to poor timing decisions.
Question 7: A financial coach notices a client has mentally separated 'lottery winnings' from 'salary' and spends each very differently. This is an example of:
- Framing effect
- Hedonic adaptation
- Mental accounting (Correct answer)
- Cognitive dissonance
Correct answer: Mental accounting
Mental accounting refers to the tendency to categorize money into separate 'accounts' based on source or intended use, treating each differently.
FFC Behavioral Finance and Coaching Techniques 2
A client consistently sells winning investments too early while holding losing ones too long.
This behavior is best explained by which bias?