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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Basics of Behavioural Finance

Which of the following best distinguishes a cognitive bias from an emotional bias in behavioural finance?

Cognitive biases come from faulty reasoning or information processing and can often be reduced through education and better information. Emotional biases come from feelings or impulses and are harder to correct, so advisers usually adapt the advice to them rather than try to remove them.

  1. ACognitive biases arise from faulty reasoning or information processing and can often be reduced by education, while emotional biases arise from feelings or impulses and are harder to correctCorrect
  2. BCognitive biases arise from feelings and are impossible to correct, while emotional biases arise from faulty statistics
  3. CCognitive biases affect only institutions, while emotional biases affect only retail investors
  4. DCognitive biases are always beneficial, while emotional biases are always harmful

Explanation

Cognitive errors stem from memory, statistical or processing mistakes and can often be moderated with better information and training. Emotional biases stem from feelings and intuition and are harder to change, so advisers often adapt the plan to them. The other options misstate the origin, the investor group or the effect.

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