finance chapter 1

risk-taking

refers to doing something that involves the possibility of a gain or a loss

financial risk tolerance

refers to your willingness to engage in a behavior that entails the possibility of a financial loss

feelings of control

reflects the amount of control you feel you have when making financial decisions

long-term goals

represent a big picture idea of where you want to be financially

short-term goals and daily tasks

represents the immediate actions needed to reach long-term goals (sometimes these tasks are called financial objectives )

people become overconfident when they

seek out confirmation on their beliefs and opinions

financial knowledge

the ability to understand personal finance information

informal networks

the interpersonal relationships you form with your family and close friends

goal time horizon

the time between creating a goal and achieving the goal

risk

the uncertainty associated with any physical, social, emotional, environmental, labor market, or financial activity

why might some people who are nearing retirement feel less confident about their financial future?

they have too much debt and they have not saved enough over their lifetime

which of the following best describes a procrastinator?

they value the present more than the future

which of the following goals is the most clearly stated?

to fund a $3,500 vacation in San Diego in 9 months

social capital

unlike human capital, social capital is not found in individuals themselves but rather in the space between individuals, or the network of connections among people

someone who strongly agrees with a.) the thought of taking risk is exciting, b.) high returns are more important that safety, and c.) making money in stocks and bonds is based on knowledge is most likely

willing to take more financial risk

financial risk tolerance refers to your

willingness to engage in a risk in which an outcome is uncertain

human capital

your ability and willingness to work, learn, earn, and make wise decisions about how to save and invest money

your education and earnings

your earnings are an indicator of the value of your human capital in the labor market and are closely related to your level of formal education

all of the following influence your human capital, except: -your health -your income -your educational level -your skill(s)

your income

financial risk tolerance

your willingness to engage in financial endeavors that have uncertain outcomes

external factors

-financial bonuses if you reach your goal -sharing your goal with others (in person or via social media)

journey to financial well-being

-keep good records -spend less than you earn -maintain appropriate insurance -save money on a regular basis

status quo bias

-personal preference for keeping things the same -overemphasizes the good aspects of a current situation -underestimates the benefits that come from making a change -creates fear of making a wrong decision regarding a new situation

internal factors

-self improvement -visualizing attainment of your goal

other influences (in addition to formal education, other resources also increase your human capital)

-your health -your willingness to relocate for higher-paying job markets -continuing professional education and skill development

which of the following elements influence your view of the financial world? I. your risk tolerance II. how much you believe you control your financial future III. knowledge about personal finance topics

I, II, and III

heuristics

Mental shortcuts or "rules of thumb" that often lead to a solution (but not always). -based on past experiences -automatic and rarely used with forethought -can help you make quick decisions, however, they sometimes lead to problematic choices and outcomes

Setting SMART financial goals

S - specific : document the when, what, where, and how aspects of the goal M - measurable : attach a quantifiable standard for achieving the goal A - attainable : be realistic about weather you can achieve the goal R - relevant : develop those financial goals that are crucial to improving your financial situation T - timely : create a goal you can meet in a reasonable amount of time

the "A" in SMART stands for

attainable

present-oriented

based on a -hedonistic perspective (doing things for pleasure, the experience, and excitement of the action) -fatalistic perspective (unable to visualize a meaningful future)

future-oriented

based on a calculation of the consequences of actions in term of a future payoff

past-oriented

based on memories, whether good or bad

as people age, their human capital can decline due to changes in the marketplace that demand different skills and abilities. One way to boost human capital is to

both enroll in a continuing education program and go back to school and learn a new skill

when people make financial decisions they rely on

cognitive evaluations, feelings, and mental shortcuts

formal networks

connects you with people in professional, recreational, leisure, and social communities

which behavioral economics bias can result in someone forgoing possible long-term growth of assets because he or she wants his or her investments to be safe?

loss aversion

benefits

educational expenses, reduced earnings while in school, and student loans

a persons time orientation can shape life outcomes. which of the following is most closely associated with lifetime wealth accumulation?

future goal

someone who feels that investing is too difficult to understand likely

has a lower level of financial literacy

lifetime earnings and education are positively related. select the ranking that represents the median lifetime earnings based on education achievement from lowest to highest

high school diploma, bachelors degree, doctoral degree, professional degree

social capital

how well you are able to form connections with other people

financial literacy

how well you can understand and use personal finance-related information

costs

human capital, income, and wealth

Loraine is thinking about her future retirement goals and needs. She has 25 years until retirement. She needs to save quite a bit of money in order to reach her retirement goal. Unfortunately, Loraine's risk tolerance is low. Given these facts, what the best recommendation for Loraine?

invest more aggressively knowing that she has time on her side to withstand any temporary setbacks with these riskier investments

planning for the future

is essential to achieving short-, intermediate-, and long-term financial goals

it is possible to increase your financial risk tolerance over time. What is the process of risk tolerance change?

knowledge leads to confidence, which leads to experience, understanding and an increase in risk tolerance

Kaylee has been dreaming of a grand vacation for several years. Last year, she started to save for this once-in-a-lifetime event. So far, she has saved $2,000 toward a goal of $25,000. Her plan is to travel in six years. What is Kaylee's goal time horizon?

long-intermediate term

all of the following are pathways to wealth, except: -saving money on a regular basis -keeping good records -spending less than income earned -minimizing insurance expenditures

minimizing insurance expenditures

Nicki is meeting with her financial planner. She is new to investing and does not have much experience in the markets. She recently took a risk-tolerance quiz and scored below average in terms of risk tolerance. Her financial planner is now recommending that she purchase shares in an aggressive mutual fund that invests in very risky small companies. The financial planner's argument is that Nicki needs to take risk in order to achieve decent returns. Do you agree with the financial planner?

no, because Nicki's risk tolerance does not math the mutual fund's risk profile

hyperbolic discounting

occurs when the value of future benefits is perceived to be lower than that of an alternative available right now

which of the following time orientations is most closely associated with a lack of goal orientation, a general feelings of hopelessness, and general pessimism

past-negative

which of the following occupations is likely to have the highest median salary

personal financial advisor

procrastination

placing more value on the present at the expense of the future

which of the following is most likely to reduce your social capital among those who may be likely to hire you for a job?

posting pictures of yourself drinking at a bar

asking someone to start saving next week, rather than some time later, helps the person

pre-commit to his or her decision

the fact that nearly everyone would like to be wealthier rather than poorer refers to his or her risk

preference