Behavioral Finance and Client Management Flashcards
6 cards from real CIMA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Behavioral Finance and Client Management flashcards as text
Which behavioral bias is most likely to cause an investment consultant to continue recommending a strategy that has performed poorly, simply because they recommended it originally?
Answer: Confirmation bias
Confirmation bias leads advisors to seek out information that supports their original recommendation while ignoring contradicting evidence.
From a client profiling perspective, the difference between a client's 'risk tolerance' and 'risk capacity' is that:
Answer: Risk tolerance is psychological willingness to bear risk; risk capacity is financial ability to absorb losses
Risk tolerance reflects a client's emotional comfort with losses, while risk capacity reflects their objective financial ability to sustain losses without jeopardizing their goals.
A CIMA professional notices that a client consistently gives more weight to a recent market crash story they heard from a friend than to long-term statistical data. This best illustrates:
Answer: Availability heuristic
The availability heuristic causes people to judge the probability of events by how easily vivid examples come to mind, leading to an overestimation of dramatic but rare events.
Which of the following best describes 'regret aversion' in the context of portfolio management?
Answer: Investors avoid decisions that might lead to regret, often resulting in inaction or herding
Regret aversion causes investors to stick with popular choices or avoid action altogether to reduce the anticipated emotional pain of making a wrong decision.
According to behavioral finance principles, which client communication strategy is most effective for long-term client retention?
Answer: Establishing clear expectations, goals, and written plans before market volatility occurs
Proactive communication, transparent expectation-setting, and written financial plans create resilient client relationships that withstand market downturns.
The concept of 'nudging' in behavioral finance, as applied by a CIMA professional, refers to:
Answer: Designing choice environments that steer clients toward better financial decisions without restricting freedom
Nudging involves structuring default options and decision environments to guide clients toward optimal choices — such as auto-enrollment in rebalancing — while preserving autonomy.