Behavioural Finance Flashcards
7 cards from real IFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Behavioural Finance flashcards as text
Why can automatic pre-authorized contribution plans (PACs) help investors overcome self-control bias?
Answer: They make saving automatic, reducing the temptation to spend now
Automating contributions takes the decision out of the investor's hands, which counters the tendency to favour current spending over long-term goals.
An investor is slow to update his view of a fund after the manager announces a major strategy change, sticking to his earlier opinion. This is:
Answer: Conservatism bias
Conservatism bias is failing to adequately revise beliefs when new information arrives.
Which statement about behavioural finance is most accurate?
Answer: It studies how psychological factors cause investors to deviate from rational decisions
Behavioural finance examines how emotions and cognitive errors lead investors to make decisions that are not fully rational.
A client judges a fund decision as 'bad' only because it lost money, even though it was well-researched and suited her risk profile. This reflects:
Answer: Outcome bias
Outcome bias is judging a decision by its result rather than by the quality of the process used to make it.
Which practice best helps an advisor limit the influence of clients' behavioural biases during volatile markets?
Answer: Rebalancing to a documented target asset allocation
Disciplined rebalancing to a pre-set allocation enforces rules-based decisions and reduces emotional reactions.
Overconfident investors who trade frequently typically experience which outcome?
Answer: Lower net returns due to trading costs and poor timing
Research shows that frequent trading driven by overconfidence tends to reduce net returns through costs and poorly timed decisions.
A client pours money into an equity fund right after a year of strong returns and redeems after a year of losses. This 'buy high, sell low' pattern is mainly caused by:
Answer: Recency bias and herding
Chasing recent performance and following the crowd leads investors to buy after gains and sell after declines.
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