CFP EXAM - NOVEMBER 2023
QUESTIONS WITH COMPLETE
SOLUTIONS
What are the Laws of Agency (insurance)? - ANSWER;Express authority, Implied
aa aa aa aa aa aa aa aa aa aa
Authority, Apparent authority
aa aa aa
What are the Exemptions to Filing as an Investment Adviser? - ANSWER;- Advisor
aa aa aa aa aa aa aa aa aa aa aa aa
whose only clients are insurance companies
aa aa aa aa aa aa
- Family office
aa aa
What are the Exceptions to Filing as an Investment Adviser? - ANSWER;- Banks that
aa aa aa aa aa aa aa aa aa aa aa aa aa
are not also investment companies
aa aa aa aa aa
- Lawyers, accountants, teachers - advice is incidental
aa aa aa aa aa aa aa
- Broker/dealers or registered reps whose performance is incidental and who get no
aa aa aa aa aa aa aa aa aa aa aa aa
special compensation for advice.
aa aa aa aa aa
- Publishers of bona fide newspapers
aa aa aa aa aa
- Those who give advice solely relating to U.S. government securities.
aa aa aa aa aa aa aa aa aa aa aa
(BLAT)
How does an Investment Adviser register with the SEC? - ANSWER;- Initially, files the
aa aa aa aa aa aa aa aa aa aa aa aa aa
ADV Part I and II with the SEC
aa aa aa aa aa aa aa aa
- Pays a minimum filing fee of $150
aa aa aa aa aa aa aa
- RIA must submit Part I of ADV and Schedule I annually
aa aa aa aa aa aa aa aa aa aa aa
What is Gross Domestic Product (GDP)? - ANSWER;- Total dollar value of all goods
aa aa aa aa aa aa aa aa aa aa aa aa aa
and services produced within the US ONLY.
aa aa aa aa aa aa aa aa
- counts economic activity without regard to yearly price fluctuations.
aa aa aa aa aa aa aa aa aa aa
- Does NOT include any income generated outside the U.S. or adjustments for foreign
aa aa aa aa aa aa aa aa aa aa aa aa aa
currencies.
aa
The challenge of reconciling two opposing beliefs.
aa aa aa aa aa aa aa
Example: Remembering the positive part of an experience but forgetting the negative.
aa aa aa aa aa aa aa aa aa aa aa aa
(Getting drunk and a hangover) - ANSWER;What is Cognitive Dissonance?
aa aa aa aa aa aa aa aa aa
Holding onto an investment for emotional reasons rather than considering more
aa aa aa aa aa aa aa aa aa aa
practical applications.
aa aa aa
,Example: My grandfather left me this stock so I can never sell it. - ANSWER;What is
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
Attachment Bias?
aa aa
The tendency to take no action rather than risk making the wrong one.
aa aa aa aa aa aa aa aa aa aa aa aa aa
Example: An investor holds onto a stock that's losing value, because if they sold it
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
and rebounded, they would feel even worse. - ANSWER;What is Fear of Regret?
aa aa aa aa aa aa aa aa aa aa aa aa aa
Investors tend to diversify evenly across whatever options are presented to them.
aa aa aa aa aa aa aa aa aa aa aa aa
Example: consider the style-box mania where investors feel compelled to own a piece
aa aa aa aa aa aa aa aa aa aa aa aa
of each box in order to feel diversified. 401K participants tend to spread their money
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
across whatever options they have. - ANSWER;What is Diversification Errors?
aa aa aa aa aa aa aa aa aa aa
An individual erroneously believes that the onset of a certain random event is likely to
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
happen following an event or a series of events.
aa aa aa aa aa aa aa aa aa aa
Example: Some investors believe that they should liquidate a position after it has
aa aa aa aa aa aa aa aa aa aa aa aa
gone up in a series of subsequent trading sessions because they do not believe that
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
the position is likely to continue going up. Conversely, other investors might hold on
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
to a stock that has fallen in multiple sessions because they view further declines as
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
improbable. The solution is investors should base their decisions on analysis. -
aa aa aa aa aa aa aa aa aa aa aa aa
ANSWER;What is Gambler's Fallacy?
aa aa aa aa
Couples or partners with shared money or finances being dishonest with each other.
aa aa aa aa aa aa aa aa aa aa aa aa aa
Example: one partner hiding excessive spending, debt, etc. from the other person. -
aa aa aa aa aa aa aa aa aa aa aa aa
ANSWER;What is Financial Infidelity?
aa aa aa aa
The 20/20 vision we have when looking at a past event and thinking we understand it,
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
when in reality we may not. - ANSWER;What is Hindsight Bias?
aa aa aa aa aa aa aa aa aa aa aa
The belief that when something goes right, it is because you were smart and made
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
the right decision. If it does not work out, it is someone else's fault or simply bad
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
luck. - ANSWER;What is Self-Affirmation Bias?
aa aa aa aa aa aa
Investors emotionally react towards new market information.
aa aa aa aa aa aa aa
Example: Good news comes out on a stock that should raise the price accordingly.
aa aa aa aa aa aa aa aa aa aa aa aa aa
However, participants overreact to the new information creating a larger-than-
aa aa aa aa aa aa aa aa aa aa
appropriate effect on the security. But the truth is new information should more or less
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
be reflected instantly in the security's price. Although the change is usually sudden
aa aa aa aa aa aa aa aa aa aa aa aa aa
and sizable, the surge erodes over time. - ANSWER;What is Overreaction?
aa aa aa aa aa aa aa aa aa aa aa
Experiences and biases that can facilitate problem-solving and probability judgements.
aa
aa aa aa aa aa aa aa aa aa
,Examples in daily life are "trial and error" and "rules of thumb"
aa aa aa aa aa aa aa aa aa aa aa
These strategies are generalizations that can result in inaccurate or irrational
aa aa aa aa aa aa aa aa aa aa
conclusions. - ANSWER;What is Heuristics?
aa aa aa aa aa
What is Behavioral Finance? - ANSWER;The study of how psychology affects finance.
aa aa aa aa aa aa aa aa aa aa aa
The tendency of investors to do nothing when action is actually called for.
aa aa aa aa aa aa aa aa aa aa aa aa aa
Example: None necessary, it is an everyday occurrence. - ANSWER;What is Status
aa aa aa aa aa aa aa aa aa aa aa
Quo Bias?
aa aa
The tendency for individuals to mimic the actions of a larger group. Can also be
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
described as Fear of Missing Out (FOMO).
aa aa aa aa aa aa aa aa
Example: This was exhibited in the late 1900's as venture capitalists and private
aa aa aa aa aa aa aa aa aa aa aa aa
investors were frantically investing huge amounts of money into internet-related
aa aa aa aa aa aa aa aa aa aa
companies. Avoiding is steering clear of a bandwagon. Those overvalued investments
aa aa aa aa aa aa aa aa aa aa aa
took a big hit from which many have not recovered. - ANSWER;What is Herd
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
Behavior?
aa
Investors seek patterns that help support decisions sometimes without adequate
aa aa aa aa aa aa aa aa aa
confirming research.
aa aa aa
Example: When the NFC wins the Super Bowl is not a basis for an investment
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
decision. - ANSWER;What is Spotting Trends that are not there?
aa aa aa aa aa aa aa aa aa aa
The tendency to make a decision based on the desired outcome rather than on the
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
probability of that outcome.
aa aa aa aa aa
Example: The investor wants to double his money in an investment without doing
aa aa aa aa aa aa aa aa aa aa aa aa
adequate research. - ANSWER;What is Outcome Bias?
aa aa aa aa aa aa aa
This is the tendency to place too much emphasis on one's own abilities. -
aa aa aa aa aa aa aa aa aa aa aa aa aa
ANSWER;What is Overconfidence?
aa aa aa
The feeling that because you own an asset, it is more valuable and special since it is
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
yours. In reality, you might not even purchase the asset if you didn't already own it.
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
Example: You inherited the family summer home and wouldn't ever sell it even though
aa aa aa aa aa aa aa aa aa aa aa aa aa
it has become a money pit. - ANSWER;What is endowment bias?
aa aa aa aa aa aa aa aa aa aa aa
The tendency of investors to become attached to a specific price as the fair market
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
value of a holding.
aa aa aa aa aa
, Example: You bought a stock at $100 a share. It drops to $50. You believe that the
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
stock's "real" value is around $100 and based on this expectation you are inclined to
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
hang on since it "should" come back. - ANSWER;What is Anchoring?
aa aa aa aa aa aa aa aa aa aa aa
The natural human tendency to accept any information that confirms our preconceived
aa aa aa aa aa aa aa aa aa aa aa
position or opinion and to disregard any information that does not support that
aa aa aa aa aa aa aa aa aa aa aa aa aa
preconceived notion.
aa aa aa
Example: An investor hears about a hot stock from an unverified source and is
aa aa aa aa aa aa aa aa aa aa aa aa aa
intrigued by the potential returns. That investor might choose to research the stock in
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
order to prove its touted potential is real by focusing only on the positive aspects of
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
the stock and disregarding any negative aspects. - ANSWER;What is Confirmation
aa aa aa aa aa aa aa aa aa aa aa
Bias?
aa
This entails looking at sums of money differently, depending on their source or
aa aa aa aa aa aa aa aa aa aa aa aa
intended use.
aa aa
Example: Some investors divide their investments between a safe investment portfolio
aa aa aa aa aa aa aa aa aa aa
and a speculative portfolio in order to prevent the negative returns that speculative
aa aa aa aa aa aa aa aa aa aa aa aa aa
investments may have from affecting the entire portfolio. All money is the same. You
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
invest in CD's (low interest) but you still have outstanding debt in your house at 5%
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
(worse vet credit cards). The interest on your debt will erode any interest you can
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
earn. While savings is important, sometimes it makes more sense to forego your
aa aa aa aa aa aa aa aa aa aa aa aa aa
savings in order to pay off debt. - ANSWER;What is Mental Accounting?
aa aa aa aa aa aa aa aa aa aa aa aa
The tendency to look at recent events (or market performance) and assume that
aa aa aa aa aa aa aa aa aa aa aa aa
those events or conditions will continue indefinitely.
aa aa aa aa aa aa aa
Example: The bond market has outperformed the stock market for the past year and
aa aa aa aa aa aa aa aa aa aa aa aa aa
will continue to do so for the future because of the continued economic downturn. -
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
ANSWER;What is Inappropriate Extrapolation?
aa aa aa aa
After a prolonged period of solid returns, the stock market declines by 15%.
aa aa aa aa aa aa aa aa aa aa aa aa
Immediately thereafter, all kinds of "experts" appear on television and in the mass
aa aa aa aa aa aa aa aa aa aa aa aa aa
media, proclaiming that we were long overdue for a correction, as if the decline were
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
obvious and inevitable. But where were these experts before the event? If it was so
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
obvious, why weren't they speaking up before the market took a dive? If it was so
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
obvious, why didn't investors start cashing out just prior to the sell-off? Hindsight
aa aa aa aa aa aa aa aa aa aa aa aa aa
biases also regularly manifest themselves between investment advisors and their
aa aa aa aa aa aa aa aa aa aa
clients. Once the reasons why an investment performed poorly are understood, it
aa aa aa aa aa aa aa aa aa aa aa aa
becomes difficult to understand why it wasn't avoided. - ANSWER;What is an
aa aa aa aa aa aa aa aa aa aa aa aa
example of Hindsight Bias?
aa aa aa aa
Investors like patterns, and recent past represents a nice, easy-to-find pattern that can
aa aa aa aa aa aa aa aa aa aa aa aa
become the basis for an investment decision. A fund that just had a great year, or a
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
stock that has had a great recent run, can influence investors to pull the trigger
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
QUESTIONS WITH COMPLETE
SOLUTIONS
What are the Laws of Agency (insurance)? - ANSWER;Express authority, Implied
aa aa aa aa aa aa aa aa aa aa
Authority, Apparent authority
aa aa aa
What are the Exemptions to Filing as an Investment Adviser? - ANSWER;- Advisor
aa aa aa aa aa aa aa aa aa aa aa aa
whose only clients are insurance companies
aa aa aa aa aa aa
- Family office
aa aa
What are the Exceptions to Filing as an Investment Adviser? - ANSWER;- Banks that
aa aa aa aa aa aa aa aa aa aa aa aa aa
are not also investment companies
aa aa aa aa aa
- Lawyers, accountants, teachers - advice is incidental
aa aa aa aa aa aa aa
- Broker/dealers or registered reps whose performance is incidental and who get no
aa aa aa aa aa aa aa aa aa aa aa aa
special compensation for advice.
aa aa aa aa aa
- Publishers of bona fide newspapers
aa aa aa aa aa
- Those who give advice solely relating to U.S. government securities.
aa aa aa aa aa aa aa aa aa aa aa
(BLAT)
How does an Investment Adviser register with the SEC? - ANSWER;- Initially, files the
aa aa aa aa aa aa aa aa aa aa aa aa aa
ADV Part I and II with the SEC
aa aa aa aa aa aa aa aa
- Pays a minimum filing fee of $150
aa aa aa aa aa aa aa
- RIA must submit Part I of ADV and Schedule I annually
aa aa aa aa aa aa aa aa aa aa aa
What is Gross Domestic Product (GDP)? - ANSWER;- Total dollar value of all goods
aa aa aa aa aa aa aa aa aa aa aa aa aa
and services produced within the US ONLY.
aa aa aa aa aa aa aa aa
- counts economic activity without regard to yearly price fluctuations.
aa aa aa aa aa aa aa aa aa aa
- Does NOT include any income generated outside the U.S. or adjustments for foreign
aa aa aa aa aa aa aa aa aa aa aa aa aa
currencies.
aa
The challenge of reconciling two opposing beliefs.
aa aa aa aa aa aa aa
Example: Remembering the positive part of an experience but forgetting the negative.
aa aa aa aa aa aa aa aa aa aa aa aa
(Getting drunk and a hangover) - ANSWER;What is Cognitive Dissonance?
aa aa aa aa aa aa aa aa aa
Holding onto an investment for emotional reasons rather than considering more
aa aa aa aa aa aa aa aa aa aa
practical applications.
aa aa aa
,Example: My grandfather left me this stock so I can never sell it. - ANSWER;What is
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
Attachment Bias?
aa aa
The tendency to take no action rather than risk making the wrong one.
aa aa aa aa aa aa aa aa aa aa aa aa aa
Example: An investor holds onto a stock that's losing value, because if they sold it
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
and rebounded, they would feel even worse. - ANSWER;What is Fear of Regret?
aa aa aa aa aa aa aa aa aa aa aa aa aa
Investors tend to diversify evenly across whatever options are presented to them.
aa aa aa aa aa aa aa aa aa aa aa aa
Example: consider the style-box mania where investors feel compelled to own a piece
aa aa aa aa aa aa aa aa aa aa aa aa
of each box in order to feel diversified. 401K participants tend to spread their money
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
across whatever options they have. - ANSWER;What is Diversification Errors?
aa aa aa aa aa aa aa aa aa aa
An individual erroneously believes that the onset of a certain random event is likely to
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
happen following an event or a series of events.
aa aa aa aa aa aa aa aa aa aa
Example: Some investors believe that they should liquidate a position after it has
aa aa aa aa aa aa aa aa aa aa aa aa
gone up in a series of subsequent trading sessions because they do not believe that
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
the position is likely to continue going up. Conversely, other investors might hold on
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
to a stock that has fallen in multiple sessions because they view further declines as
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
improbable. The solution is investors should base their decisions on analysis. -
aa aa aa aa aa aa aa aa aa aa aa aa
ANSWER;What is Gambler's Fallacy?
aa aa aa aa
Couples or partners with shared money or finances being dishonest with each other.
aa aa aa aa aa aa aa aa aa aa aa aa aa
Example: one partner hiding excessive spending, debt, etc. from the other person. -
aa aa aa aa aa aa aa aa aa aa aa aa
ANSWER;What is Financial Infidelity?
aa aa aa aa
The 20/20 vision we have when looking at a past event and thinking we understand it,
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
when in reality we may not. - ANSWER;What is Hindsight Bias?
aa aa aa aa aa aa aa aa aa aa aa
The belief that when something goes right, it is because you were smart and made
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
the right decision. If it does not work out, it is someone else's fault or simply bad
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
luck. - ANSWER;What is Self-Affirmation Bias?
aa aa aa aa aa aa
Investors emotionally react towards new market information.
aa aa aa aa aa aa aa
Example: Good news comes out on a stock that should raise the price accordingly.
aa aa aa aa aa aa aa aa aa aa aa aa aa
However, participants overreact to the new information creating a larger-than-
aa aa aa aa aa aa aa aa aa aa
appropriate effect on the security. But the truth is new information should more or less
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
be reflected instantly in the security's price. Although the change is usually sudden
aa aa aa aa aa aa aa aa aa aa aa aa aa
and sizable, the surge erodes over time. - ANSWER;What is Overreaction?
aa aa aa aa aa aa aa aa aa aa aa
Experiences and biases that can facilitate problem-solving and probability judgements.
aa
aa aa aa aa aa aa aa aa aa
,Examples in daily life are "trial and error" and "rules of thumb"
aa aa aa aa aa aa aa aa aa aa aa
These strategies are generalizations that can result in inaccurate or irrational
aa aa aa aa aa aa aa aa aa aa
conclusions. - ANSWER;What is Heuristics?
aa aa aa aa aa
What is Behavioral Finance? - ANSWER;The study of how psychology affects finance.
aa aa aa aa aa aa aa aa aa aa aa
The tendency of investors to do nothing when action is actually called for.
aa aa aa aa aa aa aa aa aa aa aa aa aa
Example: None necessary, it is an everyday occurrence. - ANSWER;What is Status
aa aa aa aa aa aa aa aa aa aa aa
Quo Bias?
aa aa
The tendency for individuals to mimic the actions of a larger group. Can also be
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
described as Fear of Missing Out (FOMO).
aa aa aa aa aa aa aa aa
Example: This was exhibited in the late 1900's as venture capitalists and private
aa aa aa aa aa aa aa aa aa aa aa aa
investors were frantically investing huge amounts of money into internet-related
aa aa aa aa aa aa aa aa aa aa
companies. Avoiding is steering clear of a bandwagon. Those overvalued investments
aa aa aa aa aa aa aa aa aa aa aa
took a big hit from which many have not recovered. - ANSWER;What is Herd
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
Behavior?
aa
Investors seek patterns that help support decisions sometimes without adequate
aa aa aa aa aa aa aa aa aa
confirming research.
aa aa aa
Example: When the NFC wins the Super Bowl is not a basis for an investment
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
decision. - ANSWER;What is Spotting Trends that are not there?
aa aa aa aa aa aa aa aa aa aa
The tendency to make a decision based on the desired outcome rather than on the
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
probability of that outcome.
aa aa aa aa aa
Example: The investor wants to double his money in an investment without doing
aa aa aa aa aa aa aa aa aa aa aa aa
adequate research. - ANSWER;What is Outcome Bias?
aa aa aa aa aa aa aa
This is the tendency to place too much emphasis on one's own abilities. -
aa aa aa aa aa aa aa aa aa aa aa aa aa
ANSWER;What is Overconfidence?
aa aa aa
The feeling that because you own an asset, it is more valuable and special since it is
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
yours. In reality, you might not even purchase the asset if you didn't already own it.
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
Example: You inherited the family summer home and wouldn't ever sell it even though
aa aa aa aa aa aa aa aa aa aa aa aa aa
it has become a money pit. - ANSWER;What is endowment bias?
aa aa aa aa aa aa aa aa aa aa aa
The tendency of investors to become attached to a specific price as the fair market
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
value of a holding.
aa aa aa aa aa
, Example: You bought a stock at $100 a share. It drops to $50. You believe that the
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
stock's "real" value is around $100 and based on this expectation you are inclined to
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
hang on since it "should" come back. - ANSWER;What is Anchoring?
aa aa aa aa aa aa aa aa aa aa aa
The natural human tendency to accept any information that confirms our preconceived
aa aa aa aa aa aa aa aa aa aa aa
position or opinion and to disregard any information that does not support that
aa aa aa aa aa aa aa aa aa aa aa aa aa
preconceived notion.
aa aa aa
Example: An investor hears about a hot stock from an unverified source and is
aa aa aa aa aa aa aa aa aa aa aa aa aa
intrigued by the potential returns. That investor might choose to research the stock in
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
order to prove its touted potential is real by focusing only on the positive aspects of
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
the stock and disregarding any negative aspects. - ANSWER;What is Confirmation
aa aa aa aa aa aa aa aa aa aa aa
Bias?
aa
This entails looking at sums of money differently, depending on their source or
aa aa aa aa aa aa aa aa aa aa aa aa
intended use.
aa aa
Example: Some investors divide their investments between a safe investment portfolio
aa aa aa aa aa aa aa aa aa aa
and a speculative portfolio in order to prevent the negative returns that speculative
aa aa aa aa aa aa aa aa aa aa aa aa aa
investments may have from affecting the entire portfolio. All money is the same. You
aa aa aa aa aa aa aa aa aa aa aa aa aa aa
invest in CD's (low interest) but you still have outstanding debt in your house at 5%
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
(worse vet credit cards). The interest on your debt will erode any interest you can
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
earn. While savings is important, sometimes it makes more sense to forego your
aa aa aa aa aa aa aa aa aa aa aa aa aa
savings in order to pay off debt. - ANSWER;What is Mental Accounting?
aa aa aa aa aa aa aa aa aa aa aa aa
The tendency to look at recent events (or market performance) and assume that
aa aa aa aa aa aa aa aa aa aa aa aa
those events or conditions will continue indefinitely.
aa aa aa aa aa aa aa
Example: The bond market has outperformed the stock market for the past year and
aa aa aa aa aa aa aa aa aa aa aa aa aa
will continue to do so for the future because of the continued economic downturn. -
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
ANSWER;What is Inappropriate Extrapolation?
aa aa aa aa
After a prolonged period of solid returns, the stock market declines by 15%.
aa aa aa aa aa aa aa aa aa aa aa aa
Immediately thereafter, all kinds of "experts" appear on television and in the mass
aa aa aa aa aa aa aa aa aa aa aa aa aa
media, proclaiming that we were long overdue for a correction, as if the decline were
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
obvious and inevitable. But where were these experts before the event? If it was so
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
obvious, why weren't they speaking up before the market took a dive? If it was so
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
obvious, why didn't investors start cashing out just prior to the sell-off? Hindsight
aa aa aa aa aa aa aa aa aa aa aa aa aa
biases also regularly manifest themselves between investment advisors and their
aa aa aa aa aa aa aa aa aa aa
clients. Once the reasons why an investment performed poorly are understood, it
aa aa aa aa aa aa aa aa aa aa aa aa
becomes difficult to understand why it wasn't avoided. - ANSWER;What is an
aa aa aa aa aa aa aa aa aa aa aa aa
example of Hindsight Bias?
aa aa aa aa
Investors like patterns, and recent past represents a nice, easy-to-find pattern that can
aa aa aa aa aa aa aa aa aa aa aa aa
become the basis for an investment decision. A fund that just had a great year, or a
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
stock that has had a great recent run, can influence investors to pull the trigger
aa aa aa aa aa aa aa aa aa aa aa aa aa aa aa
