Behavioral Finance 2012: Anyone else also having trouble?


I am taking level III for the second time now. The behavioral section has been re written by the CFA institute for 2012 with some new concepts and some old concepts put in a different order. I read the Schweser material for all three readings and now i am reading the same stuff on the actual CFAI books. I am finding very time consuming and difficult to get a good grasp and memorize so many new and old concepts. Anyone there has been sucessful in nailing down this session well? Any suggestions as far as best way to learn this material? Schweser vs CFAI books? Questions to go over? Even though this is only 5% of the test, there is a lot of stuff here that the CFA can make it very confusing for us to get the points…

I just went through this section myself, for me it’s pure memorization so I actually made notes on it which I rarely do. I think it’s going to come down to mnemonics to memorize the different emotional vs cognitive biases, and then from there its just re-reading the section highlights and drilling the qbank.

Its only 5%, yah, but you can bet your ass itll show up on the test since it’s a new section. I agree the curriculum is confusing, it just seems like they went out of their way to take a simple concept and expand it as much as possible while making sure to have a thesaurus handy in the process.

I went through the section a couple of months ago, but just watched the Schweser video on it and it was EXTREMELY helpful for me. Maybe as a retaker it was good to see the information put in a different light, but their explanation made me understand.

Hello everybody, I’m currently on it myself, and it’s going very slowly but I kind of like it (if only I didn’t have to memorise it). I’m also making notes.

There’s one thing with which I’m not familiar - See Pg 127 Book 2 CFA - Can someone please explain to me the “framing and status quo effect of matching contribution”. It’s the matching contribution part that I don’t understand.

Thanks in advance.

I’ve figured out two mnemonics for this section, they work well for me…

I was worried about remembering Pompian’s terms come exam day (friendly follower, active accumulator etc), so I remember them this way… Pompian’s Framework Is Annoying, it helped me remember the terms, but it’s also in the correct order so the emotional are on the outside and cognitive are on the inside.

The other one is for remembering the emotional biases, just think of LOSERS…

L - loss aversion

O - overconfidence

S - self-control

E - endowment

R - regret-aversion

S - status quo

Obviously I wasn’t enjoying this section a whole lot when I devised these…


Matching contribution refers to the employer matching either dollar for dllar or some multiple of your own contrinution to retirement , up to a limit. The contribution can be cash or stock. This is allowed by IRS and usually the employer follows the limit set by IRS to maximize the employee’s benefit and stay within the pre-tax limit by law.

The rest of the para stresses that where the employer does this in terms of stock and not cash , even when the employee has full discretion where to park their own money ( not the matching part ) , about 11 percent more of the employee’s funds land in the employer’s stock . This is taken by analysts to mean that the employer is recommending their stock when the employer contributes it , and employees are following this recommendation . This means that there is a framing effect ( when the employee sees that the company has contributed stock they think the stock is superior to other stock they could own ) . Also there is status quo bias because employees do not take the time to research where theiir own money should be invested and just follow the employers lead.

Thank you very much Janakisri - it was very clear!

The key here is not so much remembering and describing the behavioral concepts but being able to recognize how they are manifested in investment decisions. I happen to think this section includes some of the most important material in the exam and also half baked utterances of nonsense. But it is their game and if we choose to play we must suck it up and “Learn”.

As I have said before on another post I especialy love the new take on investor types (straight arrow, celebrity, adventurer) I am just wondering why “gangsta, metrosexual, and diva” are not represented!

I am glad to see they added some more specificity and structure around the various cognitive and emotional behavioral biases though. I think I think that is to me To me that is the stuff that is important but not telling what ends up on the exam.

Lot’s of new terms and concepts introduced in this material - nebulous quicksand that resolutely guards the portals of their treasure - what passes as established scholastic understanding in this section of the curriculum is a bit funky.

Thats “no telling” what will be on the exam…if I was not telling that would mean

  • I have insider knowledge which I dont

  • I had the ability to foretell the future which of course I dont. otherwise I would have no need to knock my brains out in pursuit of the CFA

It says that there are two types of employer contributions. 1- employer invests (matches contribution) in its own stock. 2- employer acts upon the employee instructions on where to invest (match contribution).

In first instance, 29% employees invested their own funds into company stock having taken the company’s policy of matching through own stock as kind of an endorsement or implicit advice.

In second instance, 18% employees invested their own funds into company stock since there is no endorsement effect from the employer who acts on employees instructions on where to invest/match contribution.

Hope it helps… Please correct me if I am wrong. Would greatly appreciate it.

I remember Pompian model in terms of letter pairs.

PP - P om P ian

AA - A ctive A ccumulator

PP - P assive P reserver

FF - F riendly F ollower

II - I ndependent I ndividualist

I am betting that SATISFICE will show up

I bet isolation effect will show up, at least as a distractor.

I have just wasted one whole Friday night and Sat doing these 3 readings which represents less than 5% of the exam! shoot me…

Identifying the cognitive errors is no wasting time.