2022 CFA Level III
, 2022 CFA Level III
The subject of behavioral finance can be classified as... - Answer: Behavioral
Finance Micro (BFMI) and Behavioral Finance Macro (BFMA)
Define Behavioral Finance Micro - Answer: A focus on individual level behavior
that examines the behavioral biases that distinguish individual investors from the
rational decision makers of traditional finance
Define Behavioral Finance Macro - Answer: A focus on market level behavior that
considers market anomalies that distinguish markets from the efficient markets of
traditional finance
Define cognitive errors - Answer: Behavioral biases resulting from faulty
reasoning; cognitive errors stem from basic statistical, information processing, or
memory errors
Define emotional biases - Answer: Behavioral biases resulting from reasoning
influenced by feelings; emotional biases stem from impulse or intuition.
Two classifications of cognitive errors - Answer: belief perseverance and
information processing errors
Define belief perseverance bias - Answer: is the tendency to cling to one's
previously held beliefs irrationally or illogically
, 2022 CFA Level III
Define Information Processing Errors - Answer: describes how information may be
processed and used illogically or irrationally in financial decision making
The 5 belief perseverance biases - Answer: conservatism,
confirmation,
representativeness,
illusion of control,
hindsight
The 4 processing errors - Answer: anchoring and adjustment,
mental accounting,
framing,
availability
Cognitive Dissonance - Answer: The mental discomfort that occurs when new
information conflicts with previously held beliefs or cognitions
Conservatism bias - Answer: A belief perseverance bias in which people maintain
their prior views or forecasts by inadequately incorporating new information
Cognitive Cost - Answer: The effort involved in processing new information and
updating beliefs
Confirmation bias - Answer: A belief perseverance bias in which people tend to
look for and notice what confirms their beliefs, to ignore or undervalue what
, 2022 CFA Level III
contradicts their beliefs, and to misinterpret information as support for their
beliefs
Representativeness bias - Answer: A belief perseverance bias in which people
tend to classify new information based on past experiences and classifications
base-rate neglect - Answer: A type of representativeness bias in which the base
rate or probability of the categorization is not adequately considered
sample-size neglect - Answer: A type of representativeness bias in which financial
market participants incorrectly assume that small sample sizes are representative
of populations (or "real" data)
Illusion of control bias - Answer: A belief perseverance bias in which people tend
to believe that they can control or influence outcomes when, in fact, they cannot.
Illusion of knowledge and self-attribution biases contribute to the overconfidence
bias
Hindsight bias - Answer: A bias with selective perception and retention aspects in
which people may see past events as having been predictable and reasonable to
expect
Anchoring and adjustment bias - Answer: An information-processing bias in which
the use of a psychological heuristic influences the way people estimate
probabilities
, 2022 CFA Level III
The subject of behavioral finance can be classified as... - Answer: Behavioral
Finance Micro (BFMI) and Behavioral Finance Macro (BFMA)
Define Behavioral Finance Micro - Answer: A focus on individual level behavior
that examines the behavioral biases that distinguish individual investors from the
rational decision makers of traditional finance
Define Behavioral Finance Macro - Answer: A focus on market level behavior that
considers market anomalies that distinguish markets from the efficient markets of
traditional finance
Define cognitive errors - Answer: Behavioral biases resulting from faulty
reasoning; cognitive errors stem from basic statistical, information processing, or
memory errors
Define emotional biases - Answer: Behavioral biases resulting from reasoning
influenced by feelings; emotional biases stem from impulse or intuition.
Two classifications of cognitive errors - Answer: belief perseverance and
information processing errors
Define belief perseverance bias - Answer: is the tendency to cling to one's
previously held beliefs irrationally or illogically
, 2022 CFA Level III
Define Information Processing Errors - Answer: describes how information may be
processed and used illogically or irrationally in financial decision making
The 5 belief perseverance biases - Answer: conservatism,
confirmation,
representativeness,
illusion of control,
hindsight
The 4 processing errors - Answer: anchoring and adjustment,
mental accounting,
framing,
availability
Cognitive Dissonance - Answer: The mental discomfort that occurs when new
information conflicts with previously held beliefs or cognitions
Conservatism bias - Answer: A belief perseverance bias in which people maintain
their prior views or forecasts by inadequately incorporating new information
Cognitive Cost - Answer: The effort involved in processing new information and
updating beliefs
Confirmation bias - Answer: A belief perseverance bias in which people tend to
look for and notice what confirms their beliefs, to ignore or undervalue what
, 2022 CFA Level III
contradicts their beliefs, and to misinterpret information as support for their
beliefs
Representativeness bias - Answer: A belief perseverance bias in which people
tend to classify new information based on past experiences and classifications
base-rate neglect - Answer: A type of representativeness bias in which the base
rate or probability of the categorization is not adequately considered
sample-size neglect - Answer: A type of representativeness bias in which financial
market participants incorrectly assume that small sample sizes are representative
of populations (or "real" data)
Illusion of control bias - Answer: A belief perseverance bias in which people tend
to believe that they can control or influence outcomes when, in fact, they cannot.
Illusion of knowledge and self-attribution biases contribute to the overconfidence
bias
Hindsight bias - Answer: A bias with selective perception and retention aspects in
which people may see past events as having been predictable and reasonable to
expect
Anchoring and adjustment bias - Answer: An information-processing bias in which
the use of a psychological heuristic influences the way people estimate
probabilities
