CFA Level I · CFA Level I Exam · The Behavioral Biases of Individuals
Which description of the investor assumed by traditional finance is most accurate?
Traditional finance models the investor as rational: someone who processes all available information correctly and maximizes expected utility. Framing dependence and mental accounting are documented departures from rationality that behavioral finance studies, so they do not describe the traditional investor.
- AA rational investor who maximizes expected utilityCorrect
- BAn investor whose choices depend on how a decision is framed
- CAn investor who follows mental accounts when allocating wealth
Explanation
Traditional finance assumes investors are rational, risk averse, and maximize expected utility using all available information. Framing effects and mental accounting are behavioral findings that depart from that assumption, so options B and C describe behavioral finance rather than the traditional view.
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