Psychology of Financial Planning practice questions

Answer: A) Optimism bias

• ACorrect. It underestimates personal risk.
• BIncorrect. That's feeling losses more.
• CIncorrect. That's preferring no change.
• DIncorrect. That's fixing on a reference point.

Answer: A) Regret aversion

Not acting because you fear the remorse of a decision that later turns out wrong is regret aversion. It commonly leads investors to hold losing positions too long.

• ACorrect. The client avoids acting so they won't feel the pain of a decision that later looks wrong. This kind of inaction often keeps investors in losing positions.
• BIncorrect. Overconfidence means overrating one's own knowledge or skill, which tends to cause excessive trading. The client isn't claiming special insight; they're afraid of feeling remorse later.
• CIncorrect. Herding means copying what other investors do. Nothing in the scenario says the client is following the crowd.
• DIncorrect. Recency bias means giving too much weight to recent events when predicting the future. The client's reasoning is about avoiding future self-blame, not about projecting recent returns forward.

Answer: B) Gambler's fallacy

• AIncorrect. That's valuing what you own more.
• BCorrect. Independent events don't "even out" in the short run.
• CIncorrect. That's selling winners too soon.
• DIncorrect. That's preferring no change.

Answer: C) Framing effect

Describing the same probability as a gain (success) or a loss (failure) can lead to different decisions. That is the framing effect, and planners should keep it in mind when presenting projections.

• AIncorrect. Anchoring means relying too heavily on an initial reference point, such as a purchase price or the first number heard. Here the probability is the same in both cases. Only the wording changes, from success to failure.
• BIncorrect. Mental accounting means treating money differently depending on its source or label, for example a bonus versus salary. Nothing here involves sorting money into separate mental accounts.
• CCorrect. A 90% chance of success and a 10% chance of failure say the same thing. The clients reacted differently only because one outcome was described positively and the other negatively, which is the framing effect.
• DIncorrect. The availability heuristic means judging how likely something is by how easily examples come to mind, such as a recent market crash. The difference here comes from how the planner worded the same number, not from vivid memories.

Answer: B) Self-attribution bias

• AIncorrect. That's valuing what you own more.
• BCorrect. It inflates confidence.
• CIncorrect. That's judging by vivid examples.
• DIncorrect. That's avoiding regret.

Answer: D) Financial enabling

Ongoing financial support that keeps an adult child from becoming independent, while harming the givers' own finances, is financial enabling. CFP Board lists it among the family money problems planners should learn to spot.

• AIncorrect. Financial infidelity means one partner hides or misrepresents money matters, such as secret accounts, debts or purchases. The parents are openly supporting their son and are not deceiving anyone.
• BIncorrect. Financial enmeshment means drawing a child into adult financial matters that aren't age-appropriate, such as burdening the child with the parents' money worries. Here the parents are removing financial responsibility from their son, not loading it onto him.
• CIncorrect. Compulsive buying is uncontrollable spending on goods for oneself. The parents' spending is a deliberate, repeated transfer meant to rescue another person, not a buying compulsion.
• DCorrect. Financial enabling means repeatedly giving money to someone in a way that keeps them from becoming self-sufficient, often at a real cost to the giver's own goals. Here it drains the parents' retirement savings and slows the son's independence.

Answer: C) Choice overload

• AIncorrect. That's overweighting recent events.
• BIncorrect. That's overrating skill.
• CCorrect. Too many options can cause paralysis.
• DIncorrect. That's following others.

Answer: B) Availability bias

• AIncorrect. That's preferring no change.
• BCorrect. Vivid examples seem more likely.
• CIncorrect. That's fixing on a reference point.
• DIncorrect. That's valuing what you own more.

Answer: D) Open-ended questions followed by reflective listening

Values and goals are qualitative information, and they come out best when open-ended questions are combined with reflective listening. Closed questions, questionnaires and document reviews mostly capture facts.

• AIncorrect. Closed questions are useful for checking facts such as account balances or dates, but they only get yes/no or short answers. They don't bring out the client's own account of what matters and why.
• BIncorrect. A questionnaire can measure risk attitudes, but its fixed answer choices don't let the client explain personal values, priorities and the reasons behind their goals.
• CIncorrect. Documents provide quantitative data about the client's finances. They say little about the client's values, motivations or what a meaningful life looks like to them.
• DCorrect. Open questions invite the client to tell their story and expand on it in their own words. Reflecting back what was heard confirms understanding and encourages the client to say more about their values and goals.

Answer: B) Mental accounting

Treating a tax refund as separate 'fun money' while carrying high-interest debt is mental accounting: money is handled differently by source or label even though every dollar is interchangeable.

• AIncorrect. Anchoring means relying too heavily on an initial reference point, such as a purchase price, when making later judgments. Nothing in the scenario depends on a reference number.
• BCorrect. She puts dollars in different mental 'buckets' depending on where they came from (refund vs. savings), even though money is fungible. Using the refund to pay down 24% debt would serve her better than spending it.
• CIncorrect. Loss aversion is feeling losses more strongly than equal gains. Her decision turns on labeling where the money came from, not on avoiding a loss.
• DIncorrect. Overconfidence is overestimating one's knowledge or ability, such as in picking investments. The scenario involves no judgment about her own skill.