Question

1) What is the process of financial planning ?

2) What are some examples of both internal and external data items that are collected as part of the "understanding the client's personal and financial circumstances" or data gathering as part of the financial planning process ?

3) What are the three general schools of thought for counseling ? Discuss each of them.

4) Based on their premises, compare and contrast Traditional Finance from Behavioral Finance .

5) What may be the reasons why someone can buy lottery tickets and insurance at the same time ?

6) What are the differences between discretionary and non-discretionary cash flows ?

Answer 1

Sol: 1) The process of financial planning is a six step procedure which includes:

• determining your current financial situation
• expanding financial goals
• recognizing other possible courses of action
• evaluating alternatives
• creating & implementing financial action plan
• reevaluating & revising the plan

2) Some Examples of client's internal data includes: family information, banking & investment information, tax information, financial statements & insurance portfolio information while external data includes: interest rates, housing market environment, job market environment or expected tax rates.

3) The three general schools of thought for counselling are: psychodynamic, humanistic & behavioural.Each of these has a different theory & ideas.Let's discuss each of them:

• psychodynamic counselling: It is based on sigmund freud's idea that true knowledge of people & their problems is possible through an understanding of three particular areas of human mind which are: the conscious, the subconscious & the unconscious.The main goal of psychodynamic couselling is to help people balance the three elements of their personality i.e, Id, Ego & Superego.
• Humanistic Counsellng: It is based on the theory that everyone has an innate capacity to grow emotionally & psycholologically towards the goal of self actualisation & fufillment.Thus, it aims to help clients to explore their own thoughts & feelings & to work out their own solutions for their problems.
• Behavioural Counselling: It is based on the assumption that an individual's environment determines its behaviour.Behaviourists believe that this behaviour can be learned and can therefore be unlearned.

4) 1.Traditional finance hypothesizes that markets are efficient i.e, Market prices incorporate and reflect all available and relevant information while Behavioral finance observes the financial decisions of individuals.

2.Traditional finance assumes that investors are rational i.e, Investors are risk-averse, self-interested utility maximizers who process available information in an unbiased way while Behavioral finance makes different (non-normative) assumptions about investor and market behaviors.

5) First,some forms of insurance come with a job, commonly health & life while other forms are required such as home insurance for mortgage.However, the lottery is a risk event that benefits a holder for fractional claim on prize.These games guarantee that the holder pay something while placing risk on himself & transferring risk to you.On the other side, insurance guarantees you pay some amount for a policy but it will transfer your risk to policy writer.Thus, people make decisions based on potential gain or losses relative to their specific situation rather than in absolute terms which makes them to buy lottery tickets & insurance at the same time.

6) Discretionary cash flow is a money left over once all capital projects with positive net values have been funded & payments have been made.Non-Discretionary cash flow on the other hand, are the operating expenses whose payment & amount are not within discretion.Discretionary cash flow are used to assign value on a business when buying or selling it,while Non-Discretionary cash flow are usually your needs you dont have a lot of control over.