Chapter 5 Bank

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Lambton College *

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FIN3163

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Communications

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Feb 20, 2024

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4

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17.What bias is typically a characteristic of a female investor? Hindsight. Availability bias. Loss aversion bias. oo w > Good choice! Status quo bias. Feedback: Of the biases listed, only Status Quo Bias is typically considered to be a trait most commonly identified in female investors. Reference | Chapter 5 — Behavioural Finance Learning Domain | The Know Your Client Communication Process 18.You are writing an investment communication and decide to address biases in investor behavior. Your goal is to encourage investors to take advantage of currently depressed equity investment prices. What bias would you focus on in terms of educating your investors regarding how a bias might affect their ability to take advantage of the current opportunity? Endowment. Overconfidence. The correct answer is: Regret aversion. 00w You chose Loss aversion Feedback: Periods of depressed prices often present the greatest buying opportunities. People suffering from regret aversion bias hesitate most at such moments that actually may merit aggressive behaviour. Reference | Chapter 5 — Behavioural Finance Learning Domain | The Know Your Client Communication Process 26.What characteristic of human beings explains the process of cognitive bias? Spontaneously arising mental states. Abilities to expand upon minimal inputs. Good choice! Subconscious mental procedures for processing information. o0 w > Involuntary expressions related to feelings. Feedback: Cognitive biases do not result from emotional or intellectual predisposition toward a certain judgement, but rather from subconscious mental procedures for processing information. Reference | Chapter 5 — Behavioural Finance Learning Domain | The Know Your Client Communication Process 27.Samantha went to see a mutual fund representative a few years ago. She was happy with the asset allocation he recommended, so she never went back to see him, even when he suggested that they review her portfolio and take into consideration new investment opportunities. Samantha believed that her portfolio was well invested and liked the fact that she had invested in some companies dear to her heart. Which of the following biases does Samantha demonstrate? Hindsight. Loss Aversion. Regret Aversion. oo w» Good choice! Status Quo. Feedback: When Samantha was presented with the opportunity to re-evaluate her holdings, she chose not to because she feels comfortable with her current asset allocation. Reference | Chapter 5 — Behavioural Finance Learning Domain | The Know Your Client Communication Process
17.What bias results in investors valuing an asset that they own over an asset that another individual owns? Risk aversion. Good choice! Endowment. Status Quo. oo w > Representativeness. Feedback: People who are subject to endowment bias place more value on an asset they hold property rights to than on an asset they do not hold property rights to. Reference | Chapter 5 — Behavioural Finance Learning Domain | The Know Your Client Communication Process 18.What response would a loss-averse investor be most likely to choose in selecting a preferred investment return scenario? Good choice! A 25% chance of gaining $2,000, and a 75% chance of losing nothing. A 75% chance of losing $1,000, and a 25% chance of losing nothing. A 5% chance of gaining $1,500, and a 95% chance of losing $800. oo w » An assured loss of $750. Feedback: The loss-averse investor will choose a lower potential of loss over a more rational choice. In this example, a 25% chance of gaining $2,000 and a 75% chance of losing nothing has the lowest possible loss potential, and will typically be the statement selected by the loss-averse investor. Reference | Chapter 5 — Behavioural Finance Learning Domain | The Know Your Client Communication Process 19.What bias would influence an investor’s decision to continue to hold an unprofitable investment despite little likelihood of an improvement in the investment's value? Status quo. Availability. Representativeness. oo w> Good choice! Loss aversion. Feedback: Loss aversion bias states that people generally feel a stronger impulse to avoid losses than to acquire gains. Loss aversion can prevent people from unloading unprofitable investments, even when they see little to no prospect of a turnaround. Reference | Chapter 5 — Behavioural Finance Learning Domain | The Know Your Client Communication Process
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