Foundations of Wealth Management: Risk and Behavioral Finance Quiz
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Questions and Answers

What is the term used to describe cognitive rules of thumb that simplify the decision-making process?

  • Biases
  • Heuristics (correct)
  • Representativeness
  • Availability

    • Which bias refers to the tendency to overweight information that is minimally relevant?

  • Heuristics
  • Gambler’s fallacy
  • Availability
  • Representativeness (correct)

    • What is the term for the tendency to emphasize case data over base data in decision-making?

  • Gambler’s fallacy
  • Representativeness (correct)
  • Heuristics
  • Availability

    • Which term describes the tendency to believe that future outcomes are influenced by past outcomes, like in a coin toss example?

    <p>Gambler’s fallacy</p> Signup and view all the answers

    What is the main difference between perceived risk and real risk in the context of wealth management?

    <p>Perceived risk relates to potential tax losses, while real risk involves maximizing after-tax returns.</p> Signup and view all the answers

    What is one common mistake individuals make when evaluating investment decisions?

    <p>Relying too heavily on historical data</p> Signup and view all the answers

    In mental math, what concept is highlighted by the example of rolling dice?

    <p>Relative risk</p> Signup and view all the answers

    How can framing influence decision-making in wealth management?

    <p>By altering the presentation of options</p> Signup and view all the answers

    Which concept involves the criteria for defining loss in investments?

    <p>Relative versus absolute risk</p> Signup and view all the answers

    What does the reference to 'loss averse versus risk averse' highlight about client behavior?

    <p>Clients prioritize avoiding losses over seeking gains</p> Signup and view all the answers

    How can overreliance on quarterly reports impact investment decisions?

    <p>It promotes a focus on short-term results</p> Signup and view all the answers

    What cognitive bias leads investors to only see information that confirms their original judgment?

    <p>Confirmation Bias</p> Signup and view all the answers

    Which psychological phenomenon causes investors to overestimate the potential payoff of less likely long-term investments?

    <p>Mental Math Estimation</p> Signup and view all the answers

    What tendency might lead investors to view losses as more significant than gains?

    <p>Adding &amp; Subtracting</p> Signup and view all the answers

    Why is an ongoing education process considered critical in wealth management?

    <p>To help investors make informed decisions and avoid common cognitive traps</p> Signup and view all the answers

    What responsibility does a wealth manager have according to the text regarding an investor's blindness to certain information?

    <p>Remove client's blinders and guard against wearing their own blinders</p> Signup and view all the answers

    'Misery loves company' is associated with which behavioral finance concept?

    <p>Panic Contagious Enthusiasm</p> Signup and view all the answers

    What is the primary difference between risk tolerance and risk capacity in the context of wealth management?

    <p>Risk tolerance refers to emotional limit, while risk capacity refers to financial ability to withstand market losses.</p> Signup and view all the answers

    How does memory influence risk tolerance?

    <p>When risk becomes a reality, memory becomes short term.</p> Signup and view all the answers

    What are the key factors that contribute to risk behavior in wealth management, as mentioned in the text?

    <p>Risk tolerance, risk capacity, goal importance, and perceived risk</p> Signup and view all the answers

    In wealth management, what does the term 'loss of principal versus loss of lifestyle' refer to?

    <p>Loss of lifestyle is more concerning than loss of principal.</p> Signup and view all the answers

    What does the text suggest happens to memory when risk becomes a reality?

    <p>Memory becomes short term and less influential.</p> Signup and view all the answers

    Why is it essential for wealth managers to understand a client's risk tolerance and risk capacity?

    <p>To establish an appropriate investment plan aligned with the client's emotional and financial limits.</p> Signup and view all the answers

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