Behavioral Finance - Reading 11: Investment Decision Making

Investment, education, recently, content, company

Q1. Amy Mudd was recently hired by Contis Capital Management as an education consultant for company defined contribution plans. Mudd’s role at the firm will be developing educational content and delivering that content to company employees to help them learn about their retirement plan. Jim Contis, the owner of the firm specializes in investment management, but makes the following statements to Mudd as she starts her new job:

Statement 1: Individuals in defined contribution retirement plans need to be educated about the concepts of risk and return, but once they understand investing, individuals tend to make investment decisions that are in their own best interests.

Statement 2: Once an individual investor in a defined contribution plan has attained a basic knowledge about investment concepts, they typically follow through on monitoring and making adjustments to their retirement plan.

With regard to Contis’ statements, Mudd should:

A) agree with Statement 1, but disagree with Statement 2.

B) agree with both statements.

C) disagree with Statements 1 and 2.

Q2. Dina Wilder is an institutional portfolio manager with DiCenzo Retirement Plan Advisors, a firm specializing in the administration of company defined contribution retirement plans. Lou LaJoe, Wilder’s supervisor, has asked her to compile a list of characteristics of defined contribution plan participants that limit their ability to successfully manage their investments. When making her list, Wilder wrote down the following characteristics.

Characteristic 1: Individuals do not understand the risk and return characteristics between different asset classes.

Characteristic 2: DC plan investors tend to think about the investment returns and dollar amount they will need when planning for retirement, but do not know how to calculate reasonable estimates.

Characteristic 3: Many investors simply do not care about learning about investments in order to manage their retirement plan.

LaJoe reviews Wilder’s list. Which of the characteristics she describes are CORRECT?

A) Characteristics 1 and 3 only.

B) Characteristics 1 and 2 only.

C) All three of the characteristics are correct.

Q3. Karey Kruer has been tasked with educating the employees of Midwest Microwave about their new defined contribution retirement plan. If the employees at Midwest Microwave are similar to typical defined contribution (DC) plan employees, which of the following is Kruer most likely to encounter? Plan participants:

A) understand that different assets move differently and that combining assets will reduce the risk in their portfolio.

B) who do not understand investing concepts will seek help in order to help them implement and manage their retirement plan portfolio.

C) think about retirement itself and not the dollar amount they will need to get to retirement.