Chartered Investment Manager (CIM) Practice Exam · Question
A portfolio manager observes that her clients consistently react more strongly to equivalent percentage losses in their portfolios than to equivalent percentage gains. For instance, a 5% loss causes significantly more distress than a 5% gain brings joy. This phenomenon is a prime example of which behavioral finance concept?
Loss aversion describes the tendency for people to prefer avoiding losses over acquiring equivalent gains; the pain of losing is psychologically more powerful t
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Question: A portfolio manager observes that her clients consistently react more strongly to equivalent percentage losses in their portfolios than to equivalent percentage gains. For instance, a 5% loss causes significantly more distress than a 5% gain brings joy. This phenomenon is a prime example of which behavioral finance concept?
Answer options:
- Mental Accounting ✅ Loss Aversion
- Framing Effect
- Regret Aversion
Correct answer: Loss Aversion
Explanation: Loss aversion describes the tendency for people to prefer avoiding losses over acquiring equivalent gains; the pain of losing is psychologically more powerful than the pleasure of gaining. The manager's observation directly reflects this asymmetry in emotional response to gains and losses.
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