Certified Financial Management Specialist Practice Exam

What concept describes basing spending decisions on specific reference points?

1. Anchoring

2. Interest Rates

3. Emotional Gap

4. Confirmation Bias

The correct answer is: Anchoring

The concept of anchoring refers to the cognitive bias where individuals rely heavily on the initial piece of information they receive (the "anchor") when making decisions. When it comes to spending decisions, people often use reference points from past experiences or predetermined values to evaluate the reasonableness of current prices or expenditures. For example, if someone initially sees a shirt priced at $100, and then finds a similar shirt for $70, they might perceive the second shirt as a good deal, influenced by the initial $100 anchor. This can significantly impact their spending behavior, leading them to make purchases based on the relative comparison to the anchor rather than the intrinsic value of the product or service being considered. Other concepts in the list, such as interest rates and confirmation bias, relate to different areas of financial decision-making, but do not specifically address the influence of reference points in spending behavior. Emotional gaps pertain more to behavioral finance and the psychological distance between a person's current emotional state and their financial decisions, which is distinct from the anchoring effect. Thus, anchoring plays a critical role in how individuals make spending choices based on reference points.