PFS Behavior Management Techniques 2

Question 1

Which cognitive bias causes investors to hold losing investments too long because they weight losses more heavily than equivalent gains?

Accepted Answer

Loss aversion

Answer

Loss aversion, a concept from prospect theory, causes people to feel the pain of losses roughly twice as strongly as the pleasure of equivalent gains.

Question 2

A client refuses to rebalance their portfolio despite a significant asset allocation drift. Which behavioral technique is MOST effective for a PFS to use?

Accepted Answer

Use automatic rebalancing triggers agreed upon in advance

Answer

Pre-committing to automatic rebalancing rules removes the emotional decision-making that leads clients to resist rebalancing at inopportune times.

Question 3

The 'status quo bias' in personal finance most directly leads clients to:

Accepted Answer

Prefer the current state of affairs and resist beneficial changes

Answer

Status quo bias leads clients to maintain existing financial arrangements even when alternatives would produce better outcomes.

Question 4

Which behavioral finance technique involves presenting investment choices in terms of outcomes rather than percentages to improve client comprehension?

Accepted Answer

Framing

Answer

Framing refers to how information is presented, and presenting outcomes in concrete terms (e.g., dollar amounts) rather than percentages can significantly affect client decision-making.

Question 5

A client consistently attributes their investment successes to their own skill but blames market conditions for losses. This exemplifies:

Accepted Answer

Self-attribution bias

Answer

Self-attribution bias causes people to credit their own decisions for positive outcomes while attributing negative outcomes to external factors.

(PFS) Personal Financial Specialist Practice Test

(PFS) Personal Financial Specialist Practice Test

PFS Behavior Management Techniques 2