CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
Which description of the aim of behavioral finance is most accurate?
Behavioral finance aims to describe and explain how psychological factors affect real financial decisions and market outcomes. It does not set out to prove market efficiency or to prescribe optimal portfolios for perfectly rational investors, which are traditional finance perspectives.
- ATo prove that markets are always informationally efficient
- BTo describe and explain how psychological factors influence actual financial decisions and market outcomesCorrect
- CTo prescribe the portfolio that maximizes utility for a perfectly rational investor
Explanation
Behavioral finance is descriptive: it examines how cognitive and emotional factors shape real decisions and market outcomes. Proving efficiency and prescribing a rational optimal portfolio are aims associated with traditional finance.
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