BBMF3193 WEALTH PLANNING (2).docx - QUESTION 1 The...

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QUESTION 1 The propensity to have a false and deceptive evaluation of investors capacity, intelligence, or talent is known as overconfidence bias. In a word, it is an arrogant illusion that we are better than we are. It is a risky bias that's widespread in behavioural finance and the equity markets. One of the most important skills in finance and investing is understanding where the markets are heading. Most market analysts consider their analytical abilities to be above average in this area. However, it is statistically impossible for most analysts to do better than the average analyst. The effect of getting an overconfidence bias is that it makes investors more likely to make investment errors. Overconfidence causes us to be less vigilant about their investment decisions than he should be. Many of these errors are caused by a false sense of information and/or power. For example, the tendency to overestimate one’s investment savvy by Mr. J. The overconfidence bias deceives the brain into thinking that ambitious investments will reliably beat the market. However, research indicates that even financial analysts with advanced instruments will fail to outperform the market. For example, according to a 2019 Morningstar survey, only 23% of all active funds outperformed their actively operated counterparts over the previous ten years’ period. It should come as no surprise, then, that overconfidence will lead to poor portfolio results for Mr. J. Furthermore, clients' overconfidence can cause them to overestimate their risk tolerance, resulting in investment strategies that are not truly tailored to their needs. When he adds in the high costs of purchasing and selling properties, the ability for overconfidence to affect clients' wallets and psyches becomes apparent (Aguilar, 2020). Self-control bias is described as a lack of self-control in a broad sense. Self-control bias is the inability to handle off present consumption and save for the future in the form of saving. Investors who are impaired by self-control bias prefer to take on too much risk in an effort to keep up as a result of their failure to stick to a disciplined savings strategy. This can lead to an unsuitable asset allocation. For example, the tendency to spend today rather than save for tomorrow by Mr. J. The first thing to notice about self-control bias is that it causes people to have a smaller portfolio. This is because they will put a higher emphasis on monthly luxuries than long-term retirement savings. As a result, they either spend late or invest a lower percentage
of their profits. They may have a tiny portfolio and save at a low pace, but they have big dreams. This is why individuals with self-control bias are more likely to make risky investments. This is achieved so that they can accomplish their targets with less capital.

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