CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
Which concept is most likely a behavioral alternative to the traditional finance view that investors treat all wealth as fully fungible?
Mental accounting is the behavioral alternative. It describes investors splitting money into separate mental buckets and treating them differently, which contradicts the traditional assumption that wealth is fungible. Bayesian updating and mean-variance optimization are rational, traditional tools.
- AMental accountingCorrect
- BBayesian updating
- CMean-variance optimization
Explanation
Mental accounting describes people dividing money into separate accounts with different risk attitudes, violating fungibility. Bayesian updating and mean-variance optimization are components of rational, traditional decision making.
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