CFP Curriculum Discussion Questions

Fundamentals Chapter 2 Discussion Questions: “Interpersonal Communication & Behavioral Finance”

Discussion Questions: information relating to the end-of-chapter “Discussion Questions” from the financial planning coursework material through New York University’s CFP® Program (in conjunction with Dalton Education).

Discussion Questions for Chapter 2: “Interpersonal Communication & Behavioral Finance”

  1. Identify and discuss the 3 general schools of thought for counseling.
    1.  Developmental
      1. “Believes that human development occurs in stages over time. Relationships that are formed early in life become a template for establishing relationships in adulthood. As to emotions, the Developmental Paradigm assumes that all humans develop and progress in a predictable sequence.
    2. Humanistic
      1. “Dominated by theorists whose models have their origins from a shared philosophical approach. For a client to grow, the relationship requires a transparent and genuine counselor. The advisor needs a philosophical stance that humankind is basically good and that people have the inherent capability of self-direction and growth under the right set of circumstances.”
    3.  Cognitive-Behavioral
      1. “Humans are beings and subject to the same learning principles that were established in animal research. The basic principles of classical and operant conditioning (Classical = Pavlov’s dog and Operant = reinforcing/not reinforcing behavior) are assumed to account for an individuals’ behavior and understandings throughout their lives.”
  1. What are some examples of open questions versus closed questions?
    1. “Open questions result in a person answering with a lengthy response that usually begin with words such who, what, when, where, how and why.
    2. “Closed questions seek a response that is very specific and commonly involves an answer that can be accomplished with a single word or two. Closed questions lead with is, are, do, did, could, would, have, or ‘is it not true that…”
  2. Discuss the benefits and drawbacks to the “why” question of a client?
    1. “While the ‘why’ questions are tempting and may help understand the client’s motives, the ‘why’ question may be ill-advised because it could have limited benefit for the client. It could place the client in a position of having to justify what was done, and that could put the client in a defensive posture.” – page 34-35.
  3. What are your options if you sense a client is saying one thing but believes another?
    1. “If there is an ambiguous meaning, it is best to clarify the statement from the client to insure accuracy or to clear up the ambiguity.”
      1. “By paraphrasing, the advisor may verify or correct an understanding of what the client is communicating.”
      2. Using “closed questions can help confirm some beliefs that the advisor has understood, whereas open questions may help the counselor obtain more information.”
      3. “The optimal time for a clarification is before leaving a subject matter area during the session.”
  4. Identify and discuss the 4 basic premises for Traditional Finance.
    1. Investors are rational.
    2. Markets are efficient.
    3. The mean-variance portfolio theory governs.
    4. Returns are determined by Risk (Beta).
  1. Identify and discuss the 4 basic premises for Behavioral Finance.
    1. Investors are normal.
    2. Markets are not efficient.
    3. The Behavioral Portfolio Theory governs (investors segregate their money into various mental accounting layers, aka, compartmentalizing their goals.)
    4. Risk alone does not determine returns (expected returns are not measured by Beta or risk alone. Uses other factors like book-to-market ratios, market capitalization ratios, momentum, the investor’s likes or dislikes about the stock, social issues, etc.)
  1. Identify and describe some differences between a rational investor and a normal one.
    1. “Normal investors have normal wants and desires, but may commit cognitive errors (through biases or otherwise). Normal investors may be misled by emotions while they are trying to achieve their wants.”
    2. “The rational investor, it was assumed, preferred more wealth as compared to less wealth…and [is] never confused by the manner or form of wealth.”
  2. Discuss what you believe are the reasons how someone can buy lottery tickets and insurance at the same time.
    1. Researchers “concluded that those who bought lottery tickets were risk-seeking through buying them, but were also averting risk by purchasing insurance. They reasoned that the lottery ticket purchase was to achieve higher social classes, yet the insurance protection safeguarded against dropping into lower social classes. While this could be seen as inconsistent behavior, it can be explained through the process of mental accounting that occurs when one places goals in separate layers with different degrees of risk on the pyramid.”
  3. Discuss the difference between evaluating a portfolio as a whole versus evaluating a portfolio in mental layers.
    1. “The layers of mental accounting in the pyramid [goals-hierarchy pyramid] result in multiple mental accounts…Though risk is considered within each layer, [these investors] overlook or ignore covariance among these differing mental accounts.” “Covariance is the measure of how two securities change or move together when combined or of how the price movements between two securities are related to each other. [It’s] a measure of relative risk. This integration is also called ‘diversification.’”
  4. What should you do as a financial advisor if you believe that a client’s heuristic is clouding his or her judgment?
    1. “If investors and financial advisors can understand biases and how they can direct investor behavior, then there is an opportunity for the investor or the financial planning advisor to be mindful of, or to perhaps create an advantage due to, common mistakes made by normal investors.”

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