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CFP - Psychology of Financial Planning (7% of the exam) - Section H.70

Crisis events with severe consequences

Supporting a client through job loss, serious illness, death of a spouse, divorce, natural disaster or a market crash: triage of immediate financial decisions, avoiding irreversible choices under stress, and the planner's role in stabilising before re-planning.

Financial crisis counselling

Practice question for this objective

Free samplePsychology of Financial Planningmedium

Owen, aged 57, saw his retirement portfolio reach a peak value of 1,200,000 dollars two years ago. After a broad market fall it is now worth 980,000 dollars, and his planner's revised projection shows that his stated retirement income goal remains fully funded on reasonable assumptions. Owen refuses to discuss any change to his allocation or his savings rate until the account is back at 1,200,000 dollars, and he judges every recommendation by how quickly it would restore that figure. He follows no financial news, cites no recent market event, and makes no claim to be able to influence returns. Which bias best explains Owen's position?

  • AAvailability bias, because a vivid and easily recalled event is dominating his assessment of the likelihood of a further fall and is crowding out the projection his planner has prepared for him
  • BRecency bias, because he is extrapolating the returns of the past two years forward and treating that recent period as more representative of future returns than the longer record is
  • CIllusion of control, because he believes that his own decisions about when to act can determine whether the portfolio recovers to its former value within the period he has in mind
  • DAnchoring, because the peak value of 1,200,000 dollars has become the reference figure against which he measures every decision, though it says nothing about what his retirement goal requires Correct
Anchoring fixes judgement on an irrelevant reference figure, whereas recency and availability distort judgement through recent returns and vivid remembered events. These biases are separated by the source of the distortion, not by the fact that a client is resisting advice after a fall. Anchoring starts from a number that has become salient, often for no analytic reason, and every later judgement is made as an adjustment away from it. Recency starts from the most recent stretch of returns and projects them forward. Availability starts from a specific memorable event and inflates the perceived probability of similar events. Owen supplies the anchor explicitly: a past peak value that he treats as the definition of success even after his planner has shown that the funded status of his goal does not depend on it. The stem closes off the two nearest neighbours by removing the input each one requires, namely a forecast built from recent returns and a vivid remembered event. Illusion of control fails for the same reason, since Owen claims no influence over the outcome. The planner's task is to replace the anchor with a goal-based reference, such as the capital required to fund the income target.

Why A is wrong: Availability is a genuine competitor whenever a client resists a plan after a market fall, but it needs a memorable event doing the work, and Owen names no such event and consumes no financial news at all.

Why B is wrong: Recency would show up as a forecast built from the latest returns, which is tempting given the timing of his refusal, but Owen offers no forecast at all and is instead fixed on a single historic account value.

Why C is wrong: Illusion of control is the right label where a client thinks his own choices steer market outcomes, but Owen is refusing to act rather than claiming his actions matter, and the stem rules out any such claim.

Why D is correct: An arbitrary but salient number has become the yardstick for every later judgement, which is the defining mechanism of anchoring, and the former peak carries no information about whether the funding target is met.

See more CFP practice questions, answers explained.

Exam traps in Psychology of Financial Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

  • Ask her whether the thought of stopping work at sixty worries her because of the money, so that the concern is named quickly and the meeting can move on to the projections

    Why it is wrong: This is a closed question, and the money worry it names is a reasonable guess, which is why it attracts. It permits only a yes or a no, and it hands Priya the planner's own hypothesis rather than drawing out hers, so a concern about her children or her health would go unheard.

  • Place the transfer as instructed because Harold owns the account and has never been declared incapacitated, then note in the file that the request appeared unusual and watch closely for further requests of the same kind

    Why it is wrong: An adult client's legal capacity is presumed and refusing an owner's instruction is a serious step, which gives this real pull, but executing first destroys the only protection available once the money has left the country.

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