CFP Unit 2 - Behavioral Finance Test with all Correct &
100% Verified Answers |Guaranteed to Pass
Behavioral Finance ✔Correct Answer-New field of study which relates behavioral and
cognitive psychology to financial planning and economics in an attempt to understand why
people often act irrationally during the financial decision making process.
Herd Mentality ✔Correct Answer-Tendency of individuals to follow actions of a larger group,
whether rational or not.
- believe that large group knows something they do not
- believe that large group cannot be wrong
- social pressure may be cause
Anchoring ✔Correct Answer-Individual making irrational decisions based on information that
should have no influence on the decision at hand.
- especially risky when people know little about the product or investment
ie. taking on a max mortgage that you qualify for rather than a lesser one that is based on an
affordable cash flow
Overconfidence ✔Correct Answer-Investor that believes they can control random events
merely by acquiring more knowledge and consider their abilities to be much better than they
actually are.
- takes credit for positive results
- blames external influences for negative results
ie. investor makes own decision to invest in a risky stock. if stock goes up, she takes credit. If
price drops, she blames economy. should be blaming her own decision.
Prospect Theory ✔Correct Answer-Investors generally fear losses much more than they value
gains. They will often choose the smaller of the two potential gains if it avoids a sure loss.
ie.
- Investment A - certain return of 5%
- Investment B - 75% chance of returning 8 but 25% of returning 2
- Most people will choose Investment A
Confirmation Bias ✔Correct Answer-People tend to pay more attention to information that
supports their preconceived opinions and poorly made decisions while disregarding accurate,
unsupportive information.
ie. holding on to stock falling in value far too long before selling
100% Verified Answers |Guaranteed to Pass
Behavioral Finance ✔Correct Answer-New field of study which relates behavioral and
cognitive psychology to financial planning and economics in an attempt to understand why
people often act irrationally during the financial decision making process.
Herd Mentality ✔Correct Answer-Tendency of individuals to follow actions of a larger group,
whether rational or not.
- believe that large group knows something they do not
- believe that large group cannot be wrong
- social pressure may be cause
Anchoring ✔Correct Answer-Individual making irrational decisions based on information that
should have no influence on the decision at hand.
- especially risky when people know little about the product or investment
ie. taking on a max mortgage that you qualify for rather than a lesser one that is based on an
affordable cash flow
Overconfidence ✔Correct Answer-Investor that believes they can control random events
merely by acquiring more knowledge and consider their abilities to be much better than they
actually are.
- takes credit for positive results
- blames external influences for negative results
ie. investor makes own decision to invest in a risky stock. if stock goes up, she takes credit. If
price drops, she blames economy. should be blaming her own decision.
Prospect Theory ✔Correct Answer-Investors generally fear losses much more than they value
gains. They will often choose the smaller of the two potential gains if it avoids a sure loss.
ie.
- Investment A - certain return of 5%
- Investment B - 75% chance of returning 8 but 25% of returning 2
- Most people will choose Investment A
Confirmation Bias ✔Correct Answer-People tend to pay more attention to information that
supports their preconceived opinions and poorly made decisions while disregarding accurate,
unsupportive information.
ie. holding on to stock falling in value far too long before selling
