Module 2

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Which of the following statements regarding the classical economics approach to financial counseling is CORRECT? Clients choose among alternatives based on objectively defined cost-benefit and risk-return tradeoffs. This approach is based on the use of psychoanalytic theory such as Freudian or Gestalt theory. This approach believes that increasing financial resources or reducing financial expenditures results in improved financial outcomes. This approach features the use of a SWOT analysis. A) I and II B) II, III, and IV C) III and IV D) I and III

d The answer is I and III. Statement II is incorrect; the financial counseling approach that is based on the use of psychoanalytic theory such as Freudian or Gestalt theory is the psychoanalytic approach. Statement IV is incorrect, the strategic management approach features the use of a SWOT analysis.

Which of the following statements regarding people who have a visual learning style is CORRECT? They tend to respond to graphs, charts, pictures, and reading information. They retain information by hearing or speaking. They express themselves through facial expressions. They prefer their goals and objectives to be presented as a to-do list in bullet form. A) I and III B) IV only C) I, III, and IV D) II and III

a The answer is I and III. Statement II is incorrect because people who retain information by hearing or speaking have an auditory learning style. Statement IV is not correct because individuals who prefer goals and objectives to be presented in bullet form exhibit a kinesthetic learning style.

Which of the following statements regarding counseling theory is CORRECT? In the classical economics approach to financial counseling, it is believed that improved financial outcomes can result from increased financial resources or reduced financial expenditures. Financial counseling is a process in which the planner helps a client change poor financial behavior by making recommendations to improve financial status. Planners using the economic and resource approach assume clients are rational and will change to the most favorable behavior if given the appropriate counseling The cognitive-behavioral approach to financial counseling asserts that clients' attitudes, beliefs, and values influence their behavior. A) I, III, and IV B) II, III, and IV C) II only D) I and IV

a The answer is I, III, and IV. The belief in the classical economics approach is that increasing financial resources or reducing financial expenditures results in improved financial outcomes. Rational clients are assumed when using the economic and resource approach. Financial counseling is a process that helps clients change their poor financial behavior through education and guidance. The cognitive-behavioral approach to financial counseling believes that clients' behaviors are influenced by their attitudes, beliefs, and values. Making recommendations to improve clients' financial status is not part of financial counseling.

During a meeting with his financial planner, Jack asks, "Should I be investing in the stock market to meet my savings goals?" The planner answers, "That depends. How do you feel about the possibility that your investment may decline in value?" The planner's answer is an example of A) a leading response. B) physical mirroring. C) emotional intelligence. D) verbal mirroring.

a The answer is a leading response. The planner's answer is a leading response because it guides the client to provide more detail. Physical mirroring is using the client's body language, and verbal mirroring is imitating the client's word use, tone of voice, and communication method. Emotional intelligence is the ability to recognize emotional expressions in oneself and others.

Rochelle is presented with two equal investment opportunities. The first is stated in terms of potential losses, and the second is stated in terms of potential gains. Without having any additional information, Rochelle selects the second investment. Her decision reflects A) loss aversion theory. B) the framing bias. C) herding. D) anchoring.

a The answer is loss aversion theory. Rochelle's decision reflects the loss aversion theory, which states that people fear losses much more than they value gains, and they prefer avoiding losses to acquiring the same amount in gains. Herding occurs when a person follows the actions of a larger group, whether rational or not. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. The framing bias states that people are given a frame of reference, a set of beliefs or values, which they use to interpret facts or conditions as they make decisions.

Caroline considers her investment skills to be much greater than they actually are. She takes credit for any investment decisions that have positive returns but blames the economy when her portfolio does poorly. Caroline's behavior is an example of A) overconfidence. B) confirmation bias. C) mental accounting. D) anchoring.

a The answer is overconfidence. Caroline's behavior is an example of overconfidence. Confirmation bias is paying attention to information that supports a preconceived opinion and poorly made decision, while disregarding accurate, unsupportive information. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. Mental accounting is putting money into separate "accounts" based on the function of these accounts.

Which of the following statements best describes representativeness? A) People believe the past will persist and will classify new information based on past experience or classification. B) People tend to follow the actions of a larger group, whether rational or not in a particular case. C) People often make irrational decisions based on information that should have no influence on the decision at hand. D) People often consider their investment abilities to be much better than they actually are.

a The answer is people believe the past will persist and will classify new information based on past experience or classification. The prospect theory of behavioral finance states that people tend to fear losses much more than they value gains. Making irrational decisions based on information that should have no influence on the decision at hand is anchoring. Following the actions of a larger group, whether rational or not, is herding. Considering one's abilities to be much better than they actually are is overconfidence.

When newly acquired information conflicts with pre-existing understanding, people often experience mental discomfort, also known as cognitive dissonance. All of the following are characteristics of cognitive dissonance except A) Taking credit for individual successes and blaming others or external influences for failures B) Rationalizing actions in order to adhere to the original course C) Individual changes in attitudes, beliefs, or behaviors to reduce discomfort D) Registering only information that appears to affirm an already chosen decision

a The answer is taking credit for individual successes and blaming others or external influences for failures. Self-attribution bias is an ego defense mechanism in which individuals take credit for their successes and either blame others or external influences for failures.

A financial planner asked a client the following questions. Which of them is open-ended? Do you have an IRA? What are your financial goals in terms of retirement? What are your feelings about investing in the stock market? Do you have an auto loan? A) I only B) II and III C) I, II, III, and IV D) II and IV

b The answer is II and III. Statements I and IV are closed-ended questions because they require only a "yes" or "no" answer. Statements II and III are open-ended questions because they require the client to answer in her own words.

A financial planner is meeting with a client. During a discussion of the client's estate plan, the client asks, "Would my brother be a good choice as executor of my will?" The planner answers, "What do you feel are your brother's qualifications to serve as executor?" The planner's answer is an example of A) body language. B) a leading response. C) emotional intelligence. D) verbal mirroring.

b The answer is a leading response. The planner's answer is a leading response because it guides the client to provide more detail. Body language involves facial expressions, eye contact, gestures, and body posture. Verbal mirroring is imitating the client's word use, tone of voice, and communication method. Emotional intelligence is the ability to recognize emotional expressions in one's self and others and select socially appropriate responses.

During his initial interview with a financial planner, Sam explains the tradeoffs he is willing to make between potential risks and rewards. These tradeoffs illustrate Sam's A) risk perception. B) risk tolerance. C) risk capacity. D) loss aversion.

b The answer is risk tolerance. Risk tolerance refers to the tradeoffs people are willing to make between potential risks and rewards. Risk perception refers to a person's assessment of the magnitude of the risks being traded off. Risk capacity is the degree to which a person's financial resources can cushion risks. Loss aversion theory states that people fear losses much more than they value gains, and they prefer avoiding losses to acquiring the same amount in gains.

Chloe has a kinesthetic learning style. When working with her to create her financial plan, which of the following approaches would be most useful? A) Having detailed discussions regarding goals before they are included in a written financial plan B) Allowing Chloe to write down her goals and objectives using bullet points as she expresses them C) Allowing Chloe to read information regarding financial topics before engaging in any discussions D) Using flowcharts and graphics to relate important concepts

b The answer is allowing Chloe to write down her goals and objectives using bullet points as she expresses them. Clients with a kinesthetic learning style understand concepts better using a hands-on approach. Writing down goals and objectives with bullet points as they are expressed engages clients with this learning style.

Which of the following regarding financial counseling is CORRECT? It is a process that helps clients change poor financial behavior through education and guidance. Once clients gain knowledge and resources through financial counseling, they can set realistic short- and long-term goals and make appropriate financial decisions. A) II only B) I only C) Both I and II D) Neither I nor II

both The answer is both I and II. There are several approaches to financial counseling. In different ways, these approaches assist clients in changing poor financial behavior through education and guidance. Once clients become more knowledgeable and are exposed to valuable resources through financial counseling, they can set realistic short- and long-term goals and make appropriate financial decisions.

Michael is meeting with his client, Stephanie, to gather the information he needs to develop a financial plan. During the conversation, Michael imitates Stephanie's gestures and physical positions and uses a similar tone of voice. Which communication skill is Michael using to help develop a relationship of honesty and trust with Stephanie? Anchoring Loss aversion theory Verbal mirroring Physical mirroring A) I only B) II, III, and IV C) III and IV D) I, III, and IV

c The answer is III and IV. Michael is using verbal and physical mirroring. Adopting the client's body language is an example of physical mirroring. Imitating the client's tone of voice is verbal mirroring. Anchoring and the loss aversion theory are not communication skills. Anchoring involves clients making irrational decisions based on information that should have no influence on the decisions at hand. Loss aversion theory involves investors generally fearing losses much more than they value gains.

In 2010, the average national gas price was $2.79 per gallon. In 2012, the gas price national average rose to $3.64 per gallon. Responses to gas prices were generally negative. Prices fell to an average per gallon of $3.37 in 2014, and the reaction to the decreased price was positive, even though the price was higher than the 2012 price per gallon of $2.79. This behavior is known as A) confirmation bias. B) mental accounting. C) anchoring. D) herding.

c The answer is anchoring. When average gas prices rose in 2012 to a $3.64-per-gallon threshold, individuals reset their psychological anchors to that price. As the price declined in 2014 to $3.37, the reaction was positive because it was considered in light of the higher 2012 price.

Which of the following statements regarding learning styles is CORRECT? Visual learners express themselves through facial expressions. Kinesthetic learners prefer their goals and objectives to be presented as a to-do-list in bullet form. A) Neither I nor II B) II only C) Both I and II D) I only

c The answer is both I and II. Visual learners express themselves through facial expressions. Additionally, visual learners tend to respond to graphs, charts, pictures, and reading information. Individuals who prefer goals and objectives to be presented in bullet form exhibit a kinesthetic learning style.

Which of the following best defines the concept of risk capacity? A) The trade-offs that clients are willing to make between potential risks and rewards B) The client's tendency to make decisions based on perceived gains rather than perceived losses C) The degree to which a client's financial resources can cushion risks D) The client's assessment of the magnitude of the risks being traded off

c The answer is the degree to which a client's financial resources can cushion risks. Risk capacity is the degree to which a client's financial resources can cushion risks. Risk tolerance involves trade-offs that clients are willing to make between potential risks and rewards. The client's assessment of the magnitude of the risks being traded off is known as risk perception. The client's tendency to make decisions based on perceived gains rather than perceived losses is described by the loss aversion theory.

Terry has a kinesthetic learning style. Which of the following approaches would be most useful in working with Terry to prepare a financial plan? A) Giving Terry material to read before engaging in any discussions B) Using graphs, charts, and pictures to convey information to Terry C) Relying heavily on verbal discussions before Terry's goals and recommendations are reduced to writing D) Having Terry write down his goals and objectives as they are formulated with bullet points

d The answer is having Terry write down his goals and objectives as they are formulated with bullet points. Clients with a kinesthetic learning style understand concepts better using a hands-on approach. Writing down goals and objectives with bullet points as they are formulated engages clients with this learning style.

Which of the following statements regarding the pitch and inflection of one's voice is CORRECT? A) Voice tone is primarily dependent on the frequency of the sound wave. B) Pitch is the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm. C) The inflection of one's voice is the sound quality of highness or lowness. D) Pitch and inflection influence the message conveyed more than the actual spoken words.

d The answer is pitch and inflection influence the message conveyed more than the actual spoken words. The pitch and inflection of one's voice influence the message conveyed more than the actual spoken words. The pitch of one's voice, not the inflection, is the sound quality of highness or lowness. Pitch is primarily dependent on the frequency of the sound wave. Voice tone, not pitch, is the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm.

The degree to which Zack's financial resources can cushion risks is known as A) risk perception. B) risk tolerance. C) emotional intelligence. D) risk capacity.

d The answer is risk capacity. Risk capacity is the degree to which Zack's financial resources can cushion risks. Risk tolerance refers to the tradeoffs clients are willing to make between potential risks and rewards. Emotional intelligence is the ability to recognize emotional expressions in oneself and the client and to select socially appropriate responses to both the circumstances and the client's emotions. A client's assessment of the magnitude of the risks being traded off is known as risk perception.


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