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

Which statement best distinguishes cognitive errors from emotional biases in behavioural finance?

Cognitive errors come from faulty reasoning, information processing or memory, and can often be reduced through better information and training. Emotional biases come from feelings and impulses and are harder to correct, so advisers usually adapt the plan to accommodate them.

  1. ACognitive errors arise from faulty reasoning or memory and can often be reduced with better information or training; emotional biases arise from feelings or impulses and are harder to correctCorrect
  2. BCognitive errors arise from feelings and are hard to correct; emotional biases arise from faulty reasoning and are easy to correct
  3. CBoth are caused only by lack of information and disappear with more data
  4. DCognitive errors affect only institutions while emotional biases affect only retail investors

Explanation

Cognitive errors stem from basic statistical, information-processing or memory mistakes and can be moderated through education and information. Emotional biases stem from impulses or intuition and are difficult to correct, so advisers often adapt the plan to them. The other options reverse or distort this distinction.

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