FFC Behavioral Finance and Coaching Techniques 5 — Questions and Answers
Question 1: Which of the following best describes 'herding behavior' in financial markets?
- Diversifying across many asset classes to reduce risk
- Following the crowd's investment decisions regardless of personal analysis (Correct answer)
- Automatically rebalancing a portfolio on a fixed schedule
- Investing only in domestic markets due to familiarity
Correct answer: Following the crowd's investment decisions regardless of personal analysis
Herding behavior occurs when investors follow the crowd rather than independent analysis, contributing to market bubbles and crashes.
Question 2: A client says, 'I lost $5,000 in a bad investment, but I don't want to sell because then the loss becomes real.' This thinking reflects:
- Sunk cost fallacy (Correct answer)
- Regret aversion
- Confirmation bias
- Overconfidence
Correct answer: Sunk cost fallacy
The sunk cost fallacy causes people to continue holding losing investments to avoid 'locking in' losses that have already economically occurred.
Question 3: What is the primary purpose of establishing a 'coaching agreement' at the start of an engagement?
- To legally protect the coach from liability
- To clarify roles, expectations, confidentiality, and the coaching process (Correct answer)
- To document the client's complete financial history
- To set minimum income thresholds for the coaching relationship
Correct answer: To clarify roles, expectations, confidentiality, and the coaching process
A coaching agreement defines the structure, boundaries, roles, and expectations to ensure both parties understand the nature of the coaching relationship.
Question 4: A client consistently seeks out news articles that confirm their belief that the stock market is about to crash. This exemplifies:
- Availability heuristic
- Confirmation bias (Correct answer)
- Recency bias
- Pessimism bias
Correct answer: Confirmation bias
Confirmation bias leads people to favor information that supports their pre-existing beliefs and discount information that contradicts them.
Question 5: In the transtheoretical model of behavior change, a client who is actively researching and comparing savings accounts but has not yet opened one is in which stage?
- Precontemplation
- Contemplation
- Preparation (Correct answer)
- Action
Correct answer: Preparation
The preparation stage involves actively planning and taking small steps toward change without yet implementing the main behavior change.
Question 6: Which behavioral finance concept explains why a client feels better receiving 10 separate small gifts than one large gift of the same total value?
- Hedonic framing (Correct answer)
- Diminishing marginal utility
- Prospect theory's integration principle
- Mental accounting segregation
Correct answer: Hedonic framing
Hedonic framing suggests that segregating gains maximizes positive emotional impact, while combining them yields less total pleasure than their parts.
Question 7: A financial coach asks a client: 'On a scale of 1 to 10, how important is it for you to get your debt under control?' This is an example of:
- A futuring question
- A scaling question (Correct answer)
- An open-ended question
- A miracle question
Correct answer: A scaling question
Scaling questions use a numeric scale to help clients quantify their motivation, confidence, or readiness, making abstract feelings measurable and discussable.
FFC Behavioral Finance and Coaching Techniques 5
Which of the following best describes 'herding behavior' in financial markets?