2019 CFAI Mock 7 Behavioral Finance

Benefits of including behavioral finance to an investment firm’s client assessment process least likely include:

A. Improving the firm’s client retention metrics

B. Reducing portfolio risk

C. Closer adherence to client expectations

I think the answer CFAI gives is wrong, but curious to hear what others think.

I think you could argue that incorporating behavior biases could alter portfolio risk. For example, an investor with high wealth but emotional biases would require a 10-15% deviation from mean-variance optimal portfolio. When you vary, your portfolio risk may have changed.

Honestly all of them seem most likely but I’d go for B here.

C would be great for the firm as the client is least like cry about how they aren’t working for him.

Client retention is definitely beneficial for the firm as happy clients will stick around and provide references for more clients to the firm potentially leading to greater business for the firm so not A.

Reduction in portfolio risk is in the clients favor and not so much in the firms. At the end if a client suffering from Endowment bias is reluctant to sell his concentrated position in a stock, the firm will need to abide by it rather than educate. Hence B.

Well they did say least likely, so B may still be a benefit, but A and C definitely stand out moreso than B.

B is correct. Incorporating behavioral finance does not have a direct impact on portfolio risk. In some cases, this approach will help encourage a reduction in portfolio risk, but it may also help other clients to take on more risk as appropriate. Investing as the client expects and improvements to client retention metrics are both benefits of incorporating behavioral finance. A is incorrect. Improving the advisory practice is a likely benefit of incorporating behavioral finance.

C is incorrect. Investing as the client expects is a likely benefit of incorporating behavioral finance.


This is from the answer key. I don’t agree with it. I think answer is C. When you go with behavioral finance, you are not necessarily going with client expectations. You are going against their biases and making recommendations that they may be uncomfortable with.

Could make the argument that incorporating behavioral biases will help manage expectations aka regardless if someone has high or low relative wealth/standard of living risk, if you’re aware of their bias then you can better serve them and their expectations.

Really some of these questions are ridiculous

I chose B but answer is C

After studying for 300+ hours what do you know anyway?