ANSWERS TO CHAPTER QUESTIONS
Chapter 18 Behavioral Financial Planning
1) Behavioral financial planning is the process of incorporating human weaknesses and
2) A heuristic is a shortcut in making a decision, such as:
a) Buying clothing based on brand
b) Taking a loan from a bank which says their rate is competitive
3) The behavioral life cycle theory says there are two sides to a person the planner and
the doer. The planner wants to perform operations logically in the way a personal
4) She was skeptical she would be able to save the money. She wanted a dealer closer to
home for repair purposes. She was a satisfier not an optimizer and it was too
inconvenient to travel two hours each day.
5) Satisficing may start out with the goal of operating efficiently. However, it never
6) Three Behavioral Weaknesses that might apply to investment analysis are:
a) Loss Aversion – holding shares in which you have a significant loss until they
reach original cost.
7) Behavioral characteristics common to each part of financial planning may include:
a) Tax
i) Effort to cut expense despite an overall cost including the cost of time that
makes such a quest inefficient.
8) Yes. Many people say they will wait until their shares come back even when they
don’t believe their stock is attractive.
10) Happiness research is an attempt to describe utility in broad terms. It measures
pleasure or displeasure relative to one variable or more and what happens when the
11) Money planning is concerned with traditional financial monetary factors while life
planning deals with a broader grouping of goals including non-financial ones.
12) Human weaknesses under money planning are those behavioral factors that impede
13) Basic feelings are those that are fundamental like fear, security, and hunger. Higher
level ones are more advanced like feelings of accomplishment, self-realization and so
on.
14) There are many mechanisms for enhancing savings practices:
a) Put away money at the beginning of period.
15) This question is very controversial. From a strict financial standpoint many claim that
goal planning is beyond a financial advisors purview. Others include it as part of their
ANSWERS TO CASE APPLICATION QUESTIONS
Chapter 18 Behavioral Financial Planning
1) It is very difficult to control the spending of someone who receives the cash. Most
savings structures presuppose motivation to save. At the current time Richard does
not appear to have any given his belief that the “future is too fickle.”
Richard’s spending should therefore be focused on creating that motivation for
2) Richard is demonstrating myopic behavior. He is most influenced by near term
market performance. Most fundamental analysts believe that it is folly to read
3) Monica’s investment behavior is called loss aversion. Monica wants to wait until
shares come back to their original cost so that she doesn’t feel foolish in having
4) Richard is a risk taker who likes gambling and might actually take it even if he were
shown that he might not be rewarded with higher returns for doing so.
Monica is a risk avoider. Her risk tolerance is being influenced by Richard’s
5) Monica’s fears are somewhat justified. They can only be dealt with fundamentally by
Richard becoming a more responsible spouse imbued with realistic thoughts.
Note:
Given the difficulty in establishing both an in-depth case study and realism in the
quantitative portion in relation to the capability required in an introductory course part of
