IFC Behavioural Finance

Question 1

An investor believes they can consistently pick winning stocks after a few lucky trades, and starts trading much more often. Which bias is this?

Accepted Answer

Overconfidence

Answer

Overconfidence means overestimating your own knowledge or skill. It often leads to excessive trading, too little diversification and higher costs.

Question 2

A client refuses to sell a fund until it gets back to the price they originally paid, even though its outlook has changed. Which bias does this mainly show?

Accepted Answer

Anchoring

Answer

Anchoring means relying too much on a reference point, here the purchase price, which has nothing to do with the investment's future prospects.

Question 3

Investors who sell winning investments too early and hold losing ones too long are mainly showing which tendency?

Accepted Answer

Loss aversion (the disposition effect)

Answer

Losses hurt more than equal gains feel good. So investors lock in gains quickly and avoid selling losers, which would make the loss real. This pattern is called the disposition effect.

Question 4

During a market rally, a client wants to buy a popular tech fund because 'everyone is buying it.' Which bias is this?

Accepted Answer

Herding

Answer

Herding means following what the crowd is doing instead of doing your own analysis. It can push prices into bubbles and lead people to buy near market peaks.

Question 5

A client keeps a tax refund in a speculative account as 'play money' but is very conservative with their salary savings. Which bias does this show?

Accepted Answer

Mental accounting

Answer

Mental accounting means treating money differently depending on where it came from or what it is for, even though all money is interchangeable. It can lead to an inconsistent overall risk profile.

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC Behavioural Finance