Module 2
Which of these statements regarding the classical economics approach to financial counseling is CORRECT? I. Clients choose among alternatives based on objectively defined cost-benefit and risk-return tradeoffs. II. This approach is based on the use of psychoanalytic theory such as Freudian or Gestalt theory. III. This approach believes that increasing financial resources or reducing financial expenditures results in improved financial outcomes. IV. This approach features the use of a SWOT analysis.
! and III 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.
When making financial decisions, Bruce tends to pay more attention to information that supports his preconceived opinions and poorly made decisions, while disregarding accurate, unsupported information. Bruce's behavior is an example of A) confirmation bias. B) framing bias. C) anchoring. D) herding.
A) Confirmation bias The answer is confirmation bias. Bruce's behavior illustrates confirmation bias. The framing effect 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. Anchoring is making irrational decisions based on information that should have no influence on the decision at hand. Herding is following the actions of a larger group, whether rational or not.
Brynlee has a kinesthetic learning style. Which of these statements regarding Brynlee is CORRECT? I. She is likely to enjoy physical activities. She expresses herself with body language. II. Graphs, charts, and pictures are useful in presenting information to Brynlee. A) I and II B) III only C) I, II, and III D) II only
A) The answer is I and II. Because Brynlee has a kinesthetic learning style, she is likely to enjoy physical activities. She also would be expected to express herself with body language. Statement III describes individuals with a visual learning style.
Which of these statements regarding verbal mirroring is CORRECT? I. In verbal mirroring, the planner imitates the client's word use, tone of voice, and communication method. II. Verbal mirroring includes adopting a similar verbal style to the client. III. In verbal mirroring, the planner uses the client's body language. IV. The use of verbal mirroring can improve rapport with clients. A) I, II, and IV B) I and IV C) III and IV D) I and II
A) The answer is I, II, and IV. Statement III is incorrect because the use of the client's body language is physical mirroring.
Which of these statements regarding interpersonal communication between financial planners and their clients are CORRECT? I. Mirroring is accomplished by imitating the client's body language or verbal style. II. Effective interpersonal communication involves the application of oral skills only. III. Body language can impact how clients receive and interpret messages more than any other type of communication. IV. Emotional intelligence includes the ability to recognize clients' expressions and select socially appropriate responses. A) I, III, and IV B) I and IV C) II and III D) I, II, and III
A) The answer is I, III, and IV. Effective interpersonal communication involves the application of both oral and nonverbal skills, such as the effective use of body language. LO 2.5.1
A financial planner asked a client these 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) II and III B) II and IV C) I only D) I, II, III, and IV
A) 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
Which of these statements regarding clients who have an auditory learning style is CORRECT? I. They prefer to learn by using a hands-on approach. II. They respond well to graphs, charts, and visual presentations. III. They express themselves through words and often enjoy music and conversation. A) III only B) II and III C) I and II D) I only
A) The answer is III only. Statement I is incorrect because people who prefer to learn by using a hands-on approach have a kinesthetic learning style. Statement II is incorrect because people who respond well to graphs, charts, and visual presentations have a visual learning style.
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) verbal mirroring. D) emotional intelligence.
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.
Brett is meeting Kendra, a new client. To be effective as Kendra's financial planner, Brett must understand Kendra's psychological ability to deal with uncertain outcomes including risk tolerance, risk capacity, and risk perception. During which step in the financial planning process should Brett measure Kendra's abilities? A) Data gathering B) Monitoring the recommendations C) Analyzing data D) Communicating recommendations
A) The answer is data gathering. As Brett collects data from Kendra, he should discuss her ability to accept uncertain outcomes. All of the other answer choices are steps that are too late in the process for this measurement.
A planner's ability to recognize emotional expressions in herself and the client and to select socially appropriate responses to the circumstances and the client's emotions is known as A) emotional intelligence. B) body language. C) active listening. D) mirroring.
A) The answer is emotional intelligence. A planner's ability to recognize emotional expressions in herself and the client and to select socially appropriate responses to the circumstances and the client's emotions is known as emotional intelligence. Active listening involves paying full attention to what the client is saying and responding by paraphrasing the client's comments. Mirroring is imitating the client's body language or verbal style. Body language involves facial expressions, eye contact, gestures, and body posture.
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) anchoring. D) herding.
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.
Which of these statements regarding the pitch and inflection of one's voice is CORRECT? A) Pitch and inflection influence the message conveyed more than the actual spoken words. B) Pitch is the inflection of voice or emphasis on certain words and shows attitude, whether humor, anger, sincerity, or sarcasm. C) Voice tone is primarily dependent on the frequency of the sound wave. D) The inflection of one's voice is the sound quality of highness or lowness.
A) 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. LO 2.5.1
Wilson is a financial planner who believes that clients should choose among alternatives based on objectively-defined cost-benefit and risk-return tradeoffs. Wilson's approach to financial counseling is an example of which of these? A) Classical economics approach B) Psychoanalytic approach C) Strategic management approach D) Cognitive-behavioral approach
A) The answer is the classical economics approach. Wilson's belief is an example of the classical economics approach to financial counseling. Financial planners who use the strategic management approach believe a client's goals and values should drive the client-planner relationship. The psychoanalytic approach is based on the use of psychoanalytic theory such as Freudian or Gestalt theory. In the cognitive-behavioral approach, planners attempt to substitute negative beliefs with positive attitudes that should result in better financial results.
Which of these statements regarding financial conflict is CORRECT? A) Married partners with dissimilar risk tolerance levels can present challenges during investment planning; therefore, there must be open and honest discussion between them regarding how joint funds should be invested. B) To identify potential financial conflict, financial planners should place more emphasis on what client partners discuss than how they discuss it. C) Although it is important to notice nonverbal behaviors, it is more important to pay attention to spoken words. D) To decrease conflict between parents and the adult children they support, it is prudent to have general conversations regarding expectations for each party.
A)Married partners with dissimilar risk tolerance levels can present challenges during investment planning; therefore, there must be open and honest discussion between them regarding how joint funds should be invested. Because married partners with dissimilar risk tolerance levels can present challenges during investment planning, there must be open and honest discussion between them, facilitated by the planner, regarding how joint funds should be invested. Nonverbal behaviors, which are important to notice, are equally important as the spoken word. To identify potential financial conflict, financial planners should give equal importance to what partners say and how they say it. To lessen conflict between parents and adult children they support, it is wise to establish detailed guidelines with the adult children, preferably in a written agreement with detailed terms
Which of these forms of financial manipulation is correctly described? I. Financial enmeshment most often involves one partner being more financially literate than the other. II. Financial abuse is controlling an individual's ability to use, obtain, or possess financial resources. A) Both I and II B) II only C) Neither I nor II D) I only
B) II only Statement II is correct. Financial enmeshment, or financial enabling, most often involves supporting an adult who should not need to dependent on the enabler. This typically occurs in a parent-child relationship, but can also be the case between siblings, other relatives, or friends who often see their own financial wellbeing decline when they provide the financial support. Financial control often involves one partner being more financially literate than the other.
Which of these statements regarding body language is CORRECT? I. Body language involves facial expressions, eye contact, gestures, and body posture. II. A planner's body language has little impact on how clients receive messages. A) Both I and II B) I only C) II only D) Neither I nor II
B) The answer is I only. Statement I is correct. Statement II is incorrect because body language actually impacts how clients receive messages more than any other type of communication.
Which of these statements regarding counseling theory is CORRECT? I. 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. II. Planners using the economic and resource approach assume clients are rational and will change to the most favorable behavior if given the appropriate counseling. III. Financial counseling is a process in which the planner helps a client change poor financial behavior by making recommendations to improve financial status. IV. The cognitive-behavioral approach to financial counseling asserts that clients' attitudes, beliefs, and values influence their behavior. A) II, III, and IV B) I, II, and IV C) I and IV D) II only
B) The answer is I, II, 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. The cognitive-behavioral approach to financial counseling believes that clients' behaviors are influenced by their attitudes, beliefs, and values. Financial counseling is a process that helps clients change their poor financial behavior through education and guidance. Making recommendations to improve clients' financial statuses is not part of financial counseling.
Which of these statements regarding emotional biases is CORRECT? I. Self-control bias occurs when individuals have self-discipline and favor deferred gratification over short-term goals. II. Individuals with regret-aversion bias attach undue weight to actions of commission and do not consider actions of omission. A) Neither I nor II B) II only C) I only D) Both I and II
B) The answer is II only. Self-control bias occurs when individuals lack self-discipline and favor immediate gratification over long-term goals. Those with regret-aversion bias attach undue weight to actions of commission (doing something) and do not consider actions of omission (doing nothing).
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? I Anchoring II Loss aversion theory III Verbal mirroring IV Physical mirroring A) I, III, and IV B) III and IV C) II, III, and IV D) I only
B) 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. LO 2.5.2
Darby is meeting with his client, Lillian. During a discussion of Lillian's financial plan she asks, "Should I give my oldest son, Troy, healthcare power of attorney?" Darby answers, "How well do you feel Troy would carry out your wishes?" Darby's answer is an example of A) emotional intelligence. B) a leading response. C) body language. D) verbal mirroring.
B) The answer is a leading response. Darby's answer is a leading response because it guides Lillian to provide more detail. Verbal mirroring is imitating the client's word use, tone of voice, and communication method. Body language involves facial expressions, eye contact, gestures, and body posture. Emotional intelligence is the ability to recognize emotional expressions in one's self and others and select socially appropriate responses.
Which of these is the best example of physical mirroring? A) A planner answers a client question in a way that guides the client to give more detail. B) A planner adopts the client's body language when talking to the client. C) A planner imitates the client's word use and tone of voice when talking to the client. D) A planner asks the client a question that requires only a "yes" or "no" answer.
B) The answer is a planner adopts the client's body language when talking to the client. Adopting the client's body language is an example of physical mirroring. Imitating the client's word use and tone of voice is verbal mirroring. Answering a client question in a way that guides the client to give more detail is using a leading response. A question that requires only a "yes" or "no" answer is a closed-ended question.
Clients' psychological ability to deal with uncertain outcomes include risk tolerance, risk capacity, and risk perception. During what step in the financial planning process, should financial planners measure these important abilities? A) Monitoring the recommendations B) Data gathering C) Analyzing data D) Communicating recommendations
B) The answer is data gathering. As the financial planner collects data from clients, the planner should discuss the clients' ability to accept uncertain outcomes. All of the other answer choices are steps that are too late in the process for this measurement.
Mirtza's friends tell her an investment in Lose-Ease stock is a wise idea because the company sells popular health food that has helped millions lose weight. Even though Matt, her financial planner, advises her that investing in this stock is a poor decision; Mirtza makes the investment anyway. Which of the following statements regarding Mirtza's behavior is CORRECT? A) It is an example of anchoring. B) It is an example of confirmation bias. C) It is representative of overconfidence. D) It is representative of mental accounting.
B) The answer is it is an example of confirmation bias. Mirtza's behavior is representative of confirmation bias, which 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. Overconfidence tends to make individuals believe their levels of ability are much higher than what they are.
Anthony, a client of yours, considers his investment skills to be much greater than they actually are. He takes credit for any investment decisions that have positive returns but blames the economy when his portfolio does poorly in recent months. Which of the following statements regarding Anthony's behavior is CORRECT? A) It represents mental accounting. B) It represents overconfidence. C) It is an example of confirmation bias. D) It is an example of anchoring.
B) The answer is it represents overconfidence. Anthony's behavior is an example of overconfidence, which tends to make him believe his level of ability is much higher than what it is. Confirmation bias is paying attention to information that supports a preconceived opinion and poorly made decision, while disregarding accurate, unsupportive information
All of the following statements regarding a client's attitudes, beliefs, and values are CORRECT except A) the client's attitudes reflect the client's opinions, values, and wants. B) the planner should pay little attention to a client's attitudes, beliefs, and values during the financial planning process. C) beliefs are a type of attitude because they reveal the client's understanding of some aspect of his life. D) values are attitudes and beliefs for which the client feels strongly.
B) The answer is the planner should pay little attention to a client's attitudes, beliefs, and values during the financial planning process. The planner must take into account the impact the client's attitudes, values, and beliefs may have throughout the financial planning process, especially during client-planner communication and when developing and presenting the financial plan.
Which of these statements regarding financial transparency is CORRECT? A) Partners should be transparent regarding their finances only if they have joint accounts. B) If partners appear uncomfortable discussing the details of their finances, the planner should move to another subject. C) Partners should be open with one another about assets owned separately. D) It is important that couples always have the same goals and values.
C) Partners should be open with one another about assets owned separately. Partners must be clear and unambiguous about income, spending, assets,and liabilities. Ideally, this should be the case even when couples have separate accounts, assets, or debt, especially if there are common goals shared by partners. It is important that partners share the same values and goals, or at least respect goals that differ and have agreement about how they should be met with their resources. When decisions related to family financial goals are discussed openly, the planner can make relevant recommendations that will put clients on track to meet the agreed-upon goals. This requires that partners provide details of their finances.
Which of these statements regarding people who have a visual learning style is CORRECT? I. They tend to respond to graphs, charts, pictures, and reading information. II. They retain information by hearing or speaking. III. They express themselves through facial expressions. IV. They prefer their goals and objectives to be presented as a to-do list in bullet form. A) IV only B) I, III, and IV C) I and III D) II and III
C) 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.
A financial planner asked a client the following questions. Which of them are open-ended? I. What are your long-term goals? II. Do you have a retirement plan through your employer? III. How many life insurance policies do you have? IV. Do your children plan to go to college? A) II and IV B) I and IV C) I only D) I, II, III, and IV
C) The answer is I only. This is an open-ended question because it requires the client to answer in her own words. The remaining questions are closed-ended; they require only a "yes" or "no" answer.
Which of these 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) II, III, and IV B) I and IV C) I, III, and IV D) II only
C) 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. LO 2.4.1
Chloe has a kinesthetic learning style. When working with her to create her financial plan, which of these approaches would be most useful? A) Using flowcharts and graphics to relate important concepts B) Having detailed discussions regarding goals before they are included in a written financial plan C) Allowing Chloe to write down her goals and objectives using bullet points as she expresses them D) Allowing Chloe to read information regarding financial topics before engaging in any discussions
C) 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.
Making an irrational decision based on information that should have no influence on the decision at hand is known as A) confirmation bias. B) herding. C) anchoring. D) mental accounting.
C) The answer is anchoring. Making an irrational decision based on information that should have no influence on the decision at hand is known as anchoring. Herding is the tendency to follow the actions of a larger group, whether rational or not. Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions while disregarding accurate, unsupported information. Mental accounting involves the tendency of individuals to put their money into separate "accounts" based on the function of these accounts.
Greg assumes that his clients are rational and will change to the most favorable behavior if given the appropriate counseling. He sees himself as the agent of change and focuses on obtaining and analyzing quantitative data such as cash flow, assets, and debt. Greg's approach to financial counseling is known as the A) classical economics approach. B) cognitive-behavioral approach. C) economic and resource approach. D) strategic management approach.
C) The answer is economic and resource approach. Greg's approach is the economic and resource approach. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures. The cognitive-behavioral approach believes a client's attitudes, beliefs, and values influence their behavior and tries to replace negative beliefs with positive attitudes that should result in better financial results. In the strategic management approach, the client's goals and values drive the client-planner relationship and the planner serves as a consultant.
Ellen has $10,000 in a savings account, which she has earmarked for a European vacation next year. Her car recently broke down and requires extensive repairs. Ellen does not want to spend the money in her savings account to make the repairs because she feels that money is for her upcoming vacation. Instead, she withdraws $4,000 from her traditional IRA to make the repairs. She has to pay income tax of $1,120 plus a penalty of $400 on the IRA withdrawal. This is an example of which of the following behaviors? A) Confirmation bias B) Herding C) Mental accounting D) Prospect theory
C) The answer is mental accounting. This is an example of mental accounting because Ellen's irrational financial decision resulted from mentally putting her money into separate "accounts" based on the function of those accounts. Prospect theory occurs when a person makes a bad decision because she fears losses more than she values gains. Herding occurs when a person follows the actions of a larger group, whether rational or not. Confirmation bias means people tend to pay attention to information that supports their preconceived opinions while disregarding accurate, unsupportive information.
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 capacity. B) loss aversion. C) risk tolerance. D) risk perception.
C) 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.
Ernie sees himself as a consultant to his clients and allows their goals and values to drive his relationships with them. What is his approach to financial counseling? A) Classical economics approach B) Economic and resource approach C) Strategic management approach D) Cognitive-behavioral approach
C) The answer is strategic management approach. Ernie uses the strategic management approach. In this approach, the client's goals and values drive the client-planner relationship and the planner serves as a consultant. The cognitive-behavioral approach believes a client's attitudes, beliefs, and values influence their behavior and tries to replace negative beliefs with positive attitudes that should result in better financial results. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures.
Which of these best defines the concept of risk capacity? A) The client's tendency to make decisions based on perceived gains rather than perceived losses B) The trade-offs that clients are willing to make between potential risks and rewards 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. LO 2.1.1
Which of these best defines the concept of herding? A) The tendency of individuals to make irrational decisions based on information that should have no influence on the decision at hand B) The tendency of individuals to fear losses much more than they value gains C) The tendency of individuals to follow the actions of a larger group, whether rational or not D) The tendency of individuals to consider their abilities to be much better than they actually are
C) The answer is the tendency of individuals to follow the actions of a larger group, whether rational or not. Herding is the tendency to follow the actions of a larger group, whether rational or not. The tendency of individuals to fear losses much more than they value gains is the definition of prospect theory. The tendency of individuals to make irrational decisions based on information that should have no influence on the decision at hand is anchoring. The tendency of individuals to consider their abilities to be much better than they actually are is overconfidence. LO 2.2.1
Which of the following statements regarding a client's values and context is CORRECT? I. A client's values are attitudes and beliefs for which the client feels strongly. II. A client's context is affected by his cultural influences, religious preferences, family circumstances, and age. A) Neither I nor II B) II only C) Both I and II D) I only
C) both I and II
Which of these statements regarding people who have a visual learning style is CORRECT? I. They express themselves through facial expressions. II. They understand concepts better using a hands-on approach. A) Both I and II B) II only C) Neither I nor II D) I only
D) The answer is I only. Additionally, visual learners tend to respond to graphs, charts, pictures, and reading information. Statement II is not correct because kinesthetic learners, not visual learners, understand concepts better using a hands-on approach.
Which of these statements regarding emotional biases is CORRECT? I. Self-control bias occurs when individuals lack self-discipline and favor immediate gratification over long-term goals. II. Individuals with regret-aversion bias attach undue weight to actions of omission and do not consider actions of commission. A) Both I and II B) Neither I nor II C) II only D) I only
D) The answer is I only. Those with regret-aversion bias attach undue weight to actions of commission (doing something) and do not consider actions of omission (doing nothing). Self-control bias occurs when individuals lack self-discipline and favor immediate gratification over long-term goals.
Which of the following statements regarding behavioral finance concepts is CORRECT? A client's values represent what he believes to be right. Beliefs are a type of attitude because they reveal a person's understanding of some aspect of his life. A client's profile is largely influenced by context, which includes past history or any conditions that presently exist. A planner should recognize his own attitudes, values, biases, and behaviors and be certain they do not impact recommendations made to clients. A) III only B) II, III, and IV C) II and IV D) I, II, III, and IV
D) The answer is I, II, III, and IV. All of the statements are correct.
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) mental accounting. B) herding. C) confirmation bias. D) anchoring.
D) 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
Roberto is meeting with his clients, Saul and Betsy, to define their goals. Saul is excited when he explains to Roberto his plans to purchase a new off-road vehicle. Betsy folds her arms and grimaces. What is the best action for Roberto to take next? A) Ask Saul and Betsy if they have any other goals. B) Get more details regarding the purchase of the off-road vehicle. C) Recommend how Saul and Betsy can pay for the off-road vehicle. D) Ask Betsy if the off-road vehicle is a mutually agreed-upon goal.
D) The answer is ask Betsy if the off-road vehicle is a mutually agreed-upon goal. Roberto should clarify whether or not Betsy agrees with Saul's goal. Betsy's body language may express that she is not on board with this idea. If Betsy is agreeable, Roberto should then get more details regarding the purchase of the vehicle. Roberto should not move on to other goals before Saul and Betsy are in agreement regarding this particular one. It would not be a good idea to make recommendations without more comprehensive information.
Which of these 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) Neither I nor II D) Both I and II
D) 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.
Which of these statements best describes representativeness? A) People often consider their investment abilities to be much better than they actually are. 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 believe the past will persist and will classify new information based on past experience or classification.
D) 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.
The degree to which Zack's financial resources can cushion risks is known as A) risk tolerance. B) emotional intelligence. C) risk perception. 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.
In making financial decisions, George tends to pay more attention to information that supports his preconceived opinions and poorly made decisions, while disregarding accurate, unsupported information. George's behavior is an example of A) herding. B) anchoring. C) framing effect. D) confirmation bias.
D) confirmation bias
Which of these statements regarding interpersonal communication is CORRECT? 1. Also known as communicating one on one. 2. Important throughout the financial planning process. 3. Will ensure that the listener understands and responds effectively to the communicator. 4. Involves understanding differences when communicating across generations, cultures, and genders.
The answer is I, II, III, IV. All the statements are correct. Effective interpersonal communication also involves the understanding and application of oral and nonverbal skills when interacting with clients. Proper use of these skills helps develop a relationship of honesty and trust between financial planners and their clients.
The approach to financial counseling that believes a client's attitudes, beliefs, and values influence the client's behavior and that tries to replace negative beliefs with positive attitudes that should result in better financial results is known as A) the economic and resource approach. B) the classical economics approach. C) the cognitive-behavioral approach. D) the strategic management approach.
c) The answer is the cognitive-behavioral approach. This approach to financial counseling is known as the cognitive-behavioral approach. In contrast, the economic and resource approach focuses on obtaining and analyzing quantitative data, such as cash flow, assets, and debt. In the classical economics approach, planners attempt to achieve better financial outcomes by increasing financial resources or reducing expenditures. In the strategic management approach, the client's goals and values drive the client-planner relationship and the planner serves as a consultant.
