2026/2027 CFA Level 3; Over 130 Terms, with Complete Detailed Elaborations (32pages)

The subject of behavioral finance can be classified as... - Answer: Behavioral Finance Micro (BFMI) and Behavioral Finance Macro (BFMA) Define Behavioral Finance Micro - Answer: A focus on individual level behavior that examines the behavioral biases that distinguish individual investors from the rational decision makers of traditional finance Define Behavioral Finance Macro - Answer: A focus on market level behavior that considers market anomalies that distinguish markets from the efficient markets of traditional finance Define cognitive errors - Answer: Behavioral biases resulting from faulty reasoning; cognitive errors stem from basic statistical, information processing, or memory errors Define emotional biases - Answer: Behavioral biases resulting from reasoning influenced by feelings; emotional biases stem from impulse or intuition. Two classifications of cognitive errors - Answer: belief perseverance and information processing errors Define belief perseverance bias - Answer: is the tendency to cling to one's previously held beliefs irrationally or illogically 2026 CFA Level III Define Information Processing Errors - Answer: describes how information may be processed and used illogically or irrationally in financial decision making The 5 belief perseverance biases - Answer: conservatism, confirmation, representativeness, illusion of control, hindsight The 4 processing errors - Answer: anchoring and adjustment, mental accounting, framing, availability Cognitive Dissonance - Answer: The mental discomfort that occurs when new information conflicts with previously held beliefs or cognitions Conservatism bias - Answer: A belief perseverance bias in which people maintain their prior views or forecasts by inadequately incorporating new information Cognitive Cost - Answer: The effort involved in processing new information and updating beliefs Confirmation bias - Answer: A belief perseverance bias in which people tend to look for and notice what confirms their beliefs, to ignore or undervalue what 2026 CFA Level III contradicts their beliefs, and to misinterpret information as support for their beliefs