ACCA Financial Management (F9) Certification Practice Exam

According to behavioral finance, what factors can affect investor decisions?

1. Only rational economic factors

2. Only historical data analysis

3. Emotional and illogical factors

4. Statistical forecasting methods

The correct answer is: Emotional and illogical factors

The reasoning behind selecting emotional and illogical factors stems from the core principles of behavioral finance. This field of study recognizes that investors are not always rational and are often influenced by psychological factors and emotions, such as fear, greed, and overconfidence. Behavioral finance posits that these influences can lead to biases in decision-making, causing investors to deviate from what would be considered rational economic decisions. For instance, during a market downturn, fear might lead investors to sell off their investments impulsively, resulting in losses that could have been avoided with a more rational approach. Conversely, during a market upswing, greed can cause investors to chase trends without due diligence, potentially exposing them to higher risks. These emotional and illogical factors can significantly affect choices regarding buying, holding, or selling investments, contradicting the traditional assumption that all investors act rationally based on available information. Other options such as only rational economic factors or only historical data analysis do not encompass the broader spectrum of influences on decision-making that behavioral finance highlights. Statistical forecasting methods, while useful, do not account for the emotional and psychological influences that can sway investor behavior, making them inadequate in explaining the phenomena described by behavioral finance. Thus, the recognition of both emotional and illogical factors as pivotal in