Heuristics and Biases
KNOWLEDGE EXPECTED OF: QAFP® Professionals
Highest Knowledge Level: Understanding
Knowledge Levels and Associated Verbs
|
Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
|
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
|
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
|
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
|
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|---|---|---|---|---|---|---|---|---|---|
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Define
To state exactly the meaning of
|
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
|
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
|
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
|
Compare
To note the similarities and differences between two or more things
|
Estimate
To determine an approximate value for
|
Calculate
To find the value using mathematics
|
Convert
To change from one form or purpose to another
|
Evaluate
To reach a conclusion or make a through careful study
|
Interpret
To give the meaning of / to construe or understand / to translate orally
|
Hold cursor over or click on each term to read its definition.
- Define a heuristic.
- Explain the reasons why the brain uses heuristics in decision-making.
- Explain the potential impact that a heuristic may have on decision-making.
- Time spent deciding
- Effort expended deciding
- Appropriateness of decision
- Define types of heuristics that the brain may use when making decisions, such as:
- Affect (emotional response) heuristic
- Availability heuristic
- Representativeness (estimating probabilities) heuristic
- Anchoring and adjustment heuristic
- Define a bias.
- Explain the potential impact that a bias may have on decision-making.
- Identify factors that may impact the presence of biases, such as:
- Culture
- Religious and spiritual beliefs
- Gender
- Health status
- Learned behaviour
- Identify categories of biases, such as:
- Belief-perseverance biases
- Information-processing biases
- Emotional biases
- Explain types of belief-perseverance biases that an individual may possess, such as:
- Conservatism bias: the tendency to retain original beliefs when presented with new evidence
- Confirmation bias: the tendency to focus on and interpret information in a way that confirms one’s preconceptions
- Cognitive dissonance: the tendency to experience mental stress or discomfort when holding two or more contradictory ideas, beliefs or values at the same time, or when performing an action contradictory to one’s ideas, beliefs or values, or when confronted by new information that contradicts existing ideas, beliefs or values
- Hindsight bias: the belief that past events were predictable at the time they occurred
- Illusion of control: the overestimation of one’s control over external events
- Representativeness bias: the tendency to make classifications based on a limited set of characteristics without accounting for the base rates of those characteristics
- Explain types of information-processing biases that an individual may possess, such as:
- Anchoring and adjustment: the tendency to rely heavily on a single piece of information when making a decision
- Availability / familiarity / frequency / saliency / recency bias: the tendency to overestimate the likelihood of events that are more easily recalled given the recency with which they occurred or the emotional charge they hold
- Framing bias: the tendency to draw different conclusions from different presentations of the same information
- Self-attribution bias: the tendency to claim more responsibility for successes than failures
- Sunk-cost bias: the decision to invest or spend money, time, effort, etc., despite new evidence that shows that the expected cost exceeds the expected benefits
- Outcome bias: the tendency to judge a decision by its eventual outcome instead of the quality of the decision at the time it was made
- Explain types of emotional biases that an individual may possess, such as:
- Affinity bias: the tendency to be drawn to those people, things or decisions that one views as being similar to themselves
- Disposition bias: the tendency to sell an asset that has accumulated in value and resist selling an asset that has declined in value
- Endowment bias: the tendency to overvalue an object that is owned
- Loss aversion bias: the tendency to view losses as more painful than similar amounts of gains
- Overconfidence bias: the tendency to be overly sure of oneself and one’s ideas
- Regret aversion bias: the tendency to avoid making decisions for fear of experiencing regret
- Self-control bias: the tendency to choose those actions that provide gratification in the short term over the long term
- Status quo bias: the tendency to choose to maintain the current situation rather than make changes
- Define additional biases to which financial planners may be especially susceptible, such as:
- The “curse of knowledge”: the tendency to assume other individuals have the background knowledge to understand something
- Empathy gap: the tendency to experience reduced empathy based on one’s own current emotional state
- Framing effect: the tendency to draw a conclusion based on the presentation of information
- Projection bias: the tendency to believe other individuals share one’s own priorities, attitudes or beliefs
- Illusion of transparency: the tendency to overestimate how well other individuals understands one’s own mental state
- Naive realism: the tendency to believe in one’s own objectiveness and completeness of knowledge
- Fundamental attribution error: the tendency to attribute actions to an individual’s character while underestimating situational influences
- Modality effect: the tendency to experience different levels of learning based on the presentation of information
- Define mental accounting.
- Explain how mental accounting may impact decision-making.
- Explain how decision-making may be impacted by variables such as:
- Individual’s point of reference
- Individual’s aversion to loss
- Individual’s view of guaranteed gains (losses) in comparison to expected gains (losses)
- Probability of events occurring
- Absolute and relative sizes of gain / loss
- Identify potential points of reference that may be used in the decision-making process, such as:
- Starting point (i.e., $0, no goal, no plan)
- Initial point (i.e., amount invested)
- Current point (i.e., fair market value of investment)
- Peak or trough point (i.e., highest investment value)
- Future point (i.e., expected outcome or achievement of goal)
- Status quo
KNOWLEDGE EXPECTED OF: CFP® Professionals
Highest Knowledge Level: Understanding
Knowledge Levels and Associated Verbs
|
Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
|
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
|
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
|
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
|
||||||
|---|---|---|---|---|---|---|---|---|---|
|
Define
To state exactly the meaning of
|
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
|
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
|
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
|
Compare
To note the similarities and differences between two or more things
|
Estimate
To determine an approximate value for
|
Calculate
To find the value using mathematics
|
Convert
To change from one form or purpose to another
|
Evaluate
To reach a conclusion or make a through careful study
|
Interpret
To give the meaning of / to construe or understand / to translate orally
|
Hold cursor over or click on each term to read its definition.
- Define a heuristic.
- Explain the reasons why the brain uses heuristics in decision-making.
- Explain the potential impact that a heuristic may have on decision-making.
- Time spent deciding
- Effort expended deciding
- Appropriateness of decision
- Define types of heuristics that the brain may use when making decisions, such as:
- Affect (emotional response) heuristic
- Availability heuristic
- Representativeness (estimating probabilities) heuristic
- Anchoring and adjustment heuristic
- Define a bias.
- Explain the potential impact that a bias may have on decision-making.
- Identify factors that may impact the presence of biases, such as:
- Culture
- Religious and spiritual beliefs
- Gender
- Health status
- Learned behaviour
- Identify categories of biases, such as:
- Belief-perseverance biases
- Information-processing biases
- Emotional biases
- Explain types of belief-perseverance biases that an individual may possess, such as:
- Conservatism bias: the tendency to retain original beliefs when presented with new evidence
- Confirmation bias: the tendency to focus on and interpret information in a way that confirms one’s preconceptions
- Cognitive dissonance: the tendency to experience mental stress or discomfort when holding two or more contradictory ideas, beliefs or values at the same time, or when performing an action contradictory to one’s ideas, beliefs or values, or when confronted by new information that contradicts existing ideas, beliefs or values
- Hindsight bias: the belief that past events were predictable at the time they occurred
- Illusion of control: the overestimation of one’s control over external events
- Representativeness bias: the tendency to make classifications based on a limited set of characteristics without accounting for the base rates of those characteristics
- Explain types of information-processing biases that an individual may possess, such as:
- Anchoring and adjustment: the tendency to rely heavily on a single piece of information when making a decision
- Availability / familiarity / frequency / saliency / recency bias: the tendency to overestimate the likelihood of events that are more easily recalled given the recency with which they occurred or the emotional charge they hold
- Framing bias: the tendency to draw different conclusions from different presentations of the same information
- Self-attribution bias: the tendency to claim more responsibility for successes than failures
- Sunk-cost bias: the decision to invest or spend money, time, effort, etc., despite new evidence that shows that the expected cost exceeds the expected benefits
- Outcome bias: the tendency to judge a decision by its eventual outcome instead of the quality of the decision at the time it was made
- Explain types of emotional biases that an individual may possess, such as:
- Affinity bias: the tendency to be drawn to those people, things or decisions that one views as being similar to themselves
- Disposition bias: the tendency to sell an asset that has accumulated in value and resist selling an asset that has declined in value
- Endowment bias: the tendency to overvalue an object that is owned
- Loss aversion bias: the tendency to view losses as more painful than similar amounts of gains
- Overconfidence bias: the tendency to be overly sure of oneself and one’s ideas
- Regret aversion bias: the tendency to avoid making decisions for fear of experiencing regret
- Self-control bias: the tendency to choose those actions that provide gratification in the short term over the long term
- Status quo bias: the tendency to choose to maintain the current situation rather than make changes
- Define additional biases to which financial planners may be especially susceptible, such as:
- The “curse of knowledge”: the tendency to assume other individuals have the background knowledge to understand something
- Empathy gap: the tendency to experience reduced empathy based on one’s own current emotional state
- Framing effect: the tendency to draw a conclusion based on the presentation of information
- Projection bias: the tendency to believe other individuals share one’s own priorities, attitudes or beliefs
- Illusion of transparency: the tendency to overestimate how well other individuals understands one’s own mental state
- Naive realism: the tendency to believe in one’s own objectiveness and completeness of knowledge
- Fundamental attribution error: the tendency to attribute actions to an individual’s character while underestimating situational influences
- Modality effect: the tendency to experience different levels of learning based on the presentation of information
- Define mental accounting.
- Explain how mental accounting may impact decision-making.
- Explain how decision-making may be impacted by variables such as:
- Individual’s point of reference
- Individual’s aversion to loss
- Individual’s view of guaranteed gains (losses) in comparison to expected gains (losses)
- Probability of events occurring
- Absolute and relative sizes of gain / loss
- Identify potential points of reference that may be used in the decision-making process, such as:
- Starting point (i.e., $0, no goal, no plan)
- Initial point (i.e., amount invested)
- Current point (i.e., fair market value of investment)
- Peak or trough point (i.e., highest investment value)
- Future point (i.e., expected outcome or achievement of goal)
- Status quo
previous / Values, Attitudes, Emotions and Disorders Related to Money