Chapter 5: The Behavioral Biases of Individuals

In this section

• Introduction to Behavioral Finance
  Introduction to Behavioral Finance (CFA Level 1): Why Behavioral Finance Matters, Traditional vs. Behavioral Perspectives, and Key Concepts in Behavioral Finance. Key definitions, formulas, and exam tips.
• Cognitive Errors and Emotional Biases
  Cognitive Errors and Emotional Biases (CFA Level 1): Distinguishing Cognitive from Emotional Biases, Cognitive Biases, and Emotional Biases. Key definitions, formulas, and exam tips.
• Common Investor Biases (Overconfidence, Loss Aversion, Etc.)
  Common Investor Biases (Overconfidence, Loss Aversion, Etc.) (CFA Level 1): Why Behavioral Biases Matter in Portfolio Management, Overconfidence Bias, and Manifestations of Overconfidence. Key definitions, formulas, and exam tips.
• Behavioral Biases in Portfolio Construction and Trading
  Behavioral Biases in Portfolio Construction and Trading (CFA Level 1): Behavioral Biases and Their Impact on Portfolio Management and Overconfidence and Under-Diversification. Key definitions, formulas, and exam tips.
• Behavioral Aspects of Managing Client Relationships
  Behavioral Aspects of Managing Client Relationships (CFA Level 1): Active Listening and Emotional Triggers, Spotlight on Emotional Triggers, and Tailoring Product Offerings to Individual Biases. Key definitions, formulas, and exam tips.
• Investor Profiling and Risk Tolerance
  Investor Profiling and Risk Tolerance (CFA Level 1): Distinction Between Risk Tolerance, Risk Capacity, and, Approaches to Investor Profiling, and Psychometric Questionnaires. Key definitions, formulas, and exam tips.
• Impact of Herding Behavior in Portfolio Decisions
  Impact of Herding Behavior in Portfolio Decisions (CFA Level 1): Understanding Herding Behavior in Modern Markets, Why Investors Herd, and Social Media and Real-Time Communication. Key definitions, formulas, and exam tips.
• Framing Effects on Investment Selections
  Framing Effects on Investment Selections (CFA Level 1): Concept of Framing, Prospect Theory in a Nutshell, and Real-World Examples of Framing. Key definitions, formulas, and exam tips.
• Cognitive Dissonance and Confirmation Bias in Forecasting
  Cognitive Dissonance and Confirmation Bias in Forecasting (CFA Level 1): Understanding Cognitive Dissonance, Link Between Cognitive Dissonance and Confirmation Bias, and Effects on Forecasting Accuracy. Key definitions, formulas, and exam tips.
• Mental Accounting Pitfalls in Asset Allocation
  Mental Accounting Pitfalls in Asset Allocation (CFA Level 1): What Is Mental Accounting?, How Mental Accounting Distorts Asset Allocation, and Bucket Strategies and Their Limitations. Key definitions, formulas, and exam tips.
• Overcoming Behavioral Biases Through Structured Processes
  Overcoming Behavioral Biases Through Structured Processes (CFA Level 1): Why Awareness Alone Isn’t Enough, Power of a Pre-Trade Checklist, and Key Components of a Pre-Trade Checklist. Key definitions, formulas, and exam tips.
• Behavioral Finance Tools for Advisor-Client Interactions
  Behavioral Finance Tools for Advisor-Client Interactions (CFA Level 1): Importance of Interactive Behavioral Tools in Advisory, Risk Profile Questionnaires, and Gamification and Game-Based Learning. Key definitions, formulas, and exam tips.
• Robotic and Automated Advice Implementation
  Robotic and Automated Advice Implementation (CFA Level 1): Robotic and Automated Advice: Key Concepts, Robo-Advisor Definition, and Algorithmic Underpinnings. Key definitions, formulas, and exam tips.
• Market Anomalies in Herding and Behavioral Momentum
  Market Anomalies in Herding and Behavioral Momentum (CFA Level 1): Market Anomalies: A Behavioral Perspective, Short-Term and Medium-Term Momentum, and Quick Story. Key definitions, formulas, and exam tips.
• Integrating Behavioral Factors in Risk Management
  Integrating Behavioral Factors in Risk Management (CFA Level 1): Behavioral Influences on Risk Management, Amplification Mechanisms, and Stress Testing with Behavioral Scenarios. Key definitions, formulas, and exam tips.
• Case Studies of Behavioral Biases Affecting Performance
  Case Studies of Behavioral Biases Affecting Performance (CFA Level 1): Dot-Com Crash: Overconfidence & Herding, Biases at Play, and Timeline Snapshot. Key definitions, formulas, and exam tips.