Behavioral Finance MCQ Questions and Answers for Practice

1. What is the study of psychological influences on people's financial decisions known as?

1. Financial Engineering
2. Behavioral Finance
3. Technical Analysis
4. Financial Management

2. Which of the following is a key component of behavioral finance?

1. Efficient markets
2. Investor psychology
3. Mathematical models
4. Corporate governance

3. What is the "endowment effect"?

1. Tendency to overvalue owned assets
2. Tendency to undervalue assets owned
3. Tendency to disregard external factors
4. Tendency to sell assets quickly

4. Which bias occurs when an investor believes that their past investment decisions were better than they were?

1. Hindsight Bias
2. Overconfidence Bias
3. Availability Bias
4. Anchoring Bias

5. Which bias makes investors hold on to losing investments for too long?

1. Disposition Effect
2. Mental Accounting
3. Endowment Effect
4. Loss Aversion

6. The "mental accounting" concept is based on the idea that:

1. Investors view money differently depending on its source or use
2. Investors always make rational decisions
3. Money is fungible and should be treated equally
4. Money management is unrelated to psychology

7. Behavioral finance is primarily concerned with the influence of what factors?

1. Political factors
2. Psychological factors
3. Economic factors
4. Technological factors

8. In which scenario do people show "loss aversion"?

1. Avoiding risk
2. Preferring gains of any size
3. Preferring to avoid losses
4. Choosing higher risk for greater reward

9. What is the tendency for people to make judgments based on easily available information known as?

1. Representativeness Bias
2. Availability Bias
3. Loss Aversion
4. Hindsight Bias

10. According to behavioral finance, stock prices often diverge from their fundamental value due to:

1. Efficient market hypothesis
2. Psychological factors
3. Rational expectations
4. Both 1 and 3

11. The belief that a person’s prior experiences have led to their success, even though no real skill is involved, is called:

1. Illusion of Control
2. Overconfidence Bias
3. Confirmation Bias
4. Status Quo Bias

12. Which of the following is an example of a cognitive bias?

1. Overconfidence Bias
2. Herding Effect
3. Anchoring Bias
4. All of the above

13. When investors ignore the probability of negative events happening because they are emotionally attached, this is known as:

1. Endowment Effect
2. Anchoring Bias
3. Mental Accounting
4. Overconfidence Bias

14. The tendency of people to frame outcomes in terms of potential gains rather than potential losses is associated with:

1. Risk Aversion
2. Prospect Theory
3. Mental Accounting
4. Loss Aversion

15. Which theory explains why investors exhibit risk-seeking behavior when facing potential losses?

1. Efficient Market Hypothesis
2. Prospect Theory
3. Heuristics Theory
4. Capital Asset Pricing Model (CAPM)