CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
Which assumption about investor decision making is most consistent with traditional finance rather than behavioral finance?
Traditional finance assumes that investors are rational and make decisions to maximize expected utility. The other two options, using heuristics and framing gains and losses differently, describe departures from rationality that behavioral finance studies in order to explain real investor behavior.
- AInvestors are rational and maximize expected utilityCorrect
- BInvestors use heuristics to simplify decisions
- CInvestors frame gains and losses differently
Explanation
Traditional finance assumes investors are rational, risk averse and maximize expected utility using all available information. Heuristics and framing effects are central to behavioral finance, which describes how people actually decide.
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