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

Which statement distinguishes a cognitive error from an emotional bias for an adviser dealing with clients?

Cognitive errors come from faulty reasoning or memory and can often be reduced with better information, while emotional biases come from feelings and are hard to change, so advisers typically adapt their recommendations to those biases.

  1. ACognitive errors arise from faulty reasoning and can often be reduced by better information, whereas emotional biases arise from feelings and are harder to correct, so advisers often adapt to themCorrect
  2. BEmotional biases are easily corrected with more data, while cognitive errors cannot be moderated
  3. CBoth are corrected only by increasing portfolio turnover
  4. DCognitive errors stem only from impulses and emotions, while emotional biases stem from statistics

Explanation

Cognitive errors come from statistical or memory mistakes and can be moderated through education. Emotional biases stem from impulse or intuition and are difficult to change, so advisers usually adapt the advice to them. The other options reverse or distort this.

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