Behavioral Finance Model Applicability

CFA Level III Portfolio Management
#1

which of the following would least likely limit the applicability of behavioral models to Bailey?

  1. Presenting both cognitive and emotional biases
  2. Exhibiting behavioral changes as he ages
  3. Displaying characteristics of multiple investor types
#2

Honestly I have difficulty understanding this question since it’s so brief…

If a gun was put against my head I would say answer 1. Since I perhaps don’t understand the full context of the question I might be off-base. But here’s my logic:

  1. People often have both cognitive and emotional biases. If they mean “presenting” as “exhibiting” or “showing” in this question, then this answer is simply summarizing the reality that people have both cognitive and emotional biases… and the whole development and study of behavioral models is based upon this widespread observation.

  2. As behavior changes, the models must change too. So the applicability of Bailey’s current behavioral model steadily could become outdated and less applicable - and need to be constantly checked for refreshing/updating in order to avoid obsolescence of the current (increasingly irrelevant) model as Bailey ages.

  3. If Bailey shows strong characteristics of multiple investor types, it can be hard or even inappropriate to label him/her as one investor type and base work around recommendations for that type.

Does this help? On the exam, you’d have a much deeper context I would hope. I don’t remember any vague questions on behavioral finance in my mock exams, although I do remember many frustrating ones I had to memorize lists around (the biases, the investor types with characteristics, etc.).

Cheers - good luck - you got thisđź‘Ť

#3

Actually yes the question was not appropriately worded.

But when I read the LOS related to this question then I realized that he wants to ask out of all possible limitations of using BIT what is not the limitation for Bailey (client).

These all are limitations but in the case of this client, the third one is not applicable because he is an Independent individualist.

Thank you for your reply :slight_smile:

1 Like
#4

Great - glad you got it sorted!