The subject of behavioral finance can be classified as... - Answer: Behavioral
Finance Micro (BFMI) and Behavioral Finance Macro (BFMA)
Define Behavioral Finance Micro - Answer: A focus on individual level behavior
that examines the behavioral biases that distinguish individual investors from the
rational decision makers of traditional finance
Define Behavioral Finance Macro - Answer: A focus on market level behavior that
considers market anomalies that distinguish markets from the efficient markets of
traditional finance
Define cognitive errors - Answer: Behavioral biases resulting from faulty
reasoning; cognitive errors stem from basic statistical, information processing, or
memory errors
Define emotional biases - Answer: Behavioral biases resulting from reasoning
influenced by feelings; emotional biases stem from impulse or intuition.
Two classifications of cognitive errors - Answer: belief perseverance and
information processing errors
Define belief perseverance bias - Answer: is the tendency to cling to one's
previously held beliefs irrationally or illogically
2022 CFA Level III
Define Information Processing Errors - Answer: describes how information may be
processed and used illogically or irrationally in financial decision making
The 5 belief perseverance biases - Answer: conservatism,
confirmation,
representativeness,
illusion of control,
hindsight
The 4 processing errors - Answer: anchoring and adjustment,
mental accounting,
framing,
availability
Cognitive Dissonance - Answer: The mental discomfort that occurs when new
information conflicts with previously held beliefs or cognitions
Conservatism bias - Answer: A belief perseverance bias in which people maintain
their prior views or forecasts by inadequately incorporating new information
Cognitive Cost - Answer: The effort involved in processing new information and
updating beliefs
Confirmation bias - Answer: A belief perseverance bias in which people tend to
look for and notice what confirms their beliefs, to ignore or undervalue what
2022 CFA Level III
contradicts their beliefs, and to misinterpret information as support for their
beliefs
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