IFC Behavioural Finance 5

Question 1

Why can automatic pre-authorized contribution plans (PACs) help investors overcome self-control bias?

Accepted Answer

They make saving automatic, reducing the temptation to spend now

Answer

Automating contributions takes the decision out of the investor's hands, which counters the tendency to favour current spending over long-term goals.

Question 2

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:

Accepted Answer

Conservatism bias

Answer

Conservatism bias is failing to adequately revise beliefs when new information arrives.

Question 3

Which statement about behavioural finance is most accurate?

Accepted Answer

It studies how psychological factors cause investors to deviate from rational decisions

Answer

Behavioural finance examines how emotions and cognitive errors lead investors to make decisions that are not fully rational.

Question 4

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:

Accepted Answer

Outcome bias

Answer

Outcome bias is judging a decision by its result rather than by the quality of the process used to make it.

Question 5

Which practice best helps an advisor limit the influence of clients' behavioural biases during volatile markets?

Accepted Answer

Rebalancing to a documented target asset allocation

Answer

Disciplined rebalancing to a pre-set allocation enforces rules-based decisions and reduces emotional reactions.

IFC - Investment Funds in Canada Practice Test