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King’s Business School, King’s College London

This paper is part of an examination and counts towards the award of a degree.
Examinations are governed by the College Regulations under the authority of the
Academic Board. Students must not share or distribute this examination paper.
Examination 2024/25
Assessment Format: 8 Hour Examination Open Book Online Examination
Module code and title: 6QQMB311 – Behavioural Finance
Examination Period: Period 1, January 2025
Time allowed: Students should spend no longer than 2 hours on this paper. The
paper will be available for 8-hours from 09:00 UK Time on Thursday 9 January
2025. Students will need to submit their answers by 17:00 UK Time on Thursday 9
January 2025
INSTRUCTIONS TO CANDIDATES:
1. Answer only THREE of the FIVE questions. If more than three questions are
answered, only the first three will be marked.
2. The maximum overall word count is 3000 words, with 10% flexibility.
3. Paste any required diagrams and graphs for your answers directly onto the
answer sheet using software or uploaded photos.
4. A template cover sheet has been provided on the KEATS page.
You should complete the ‘cover sheet’ and then type your answers below, or
attach to the front of your submission. Make sure you clearly indicate the
questions you are answering (e.g. Question 1, Part A).
5. If you have a PAA cover sheet, you should include this in addition to the
template answer sheet.
6. While three questions equate to 99 marks (as equally weighted questions),
marks will be scaled and awarded out of 100%.
7. Save your work regularly, at least every 15 minutes.
ONLINE SUBMISSION INSTRUCTIONS:
1. Your answer sheet should be submitted via the Turnitin submission link on the
module KEATS page.
2. Ensure your document is submitted through Turnitin with the title CANDIDATE
ID – MODULE CODE- e.g. AF12345-6QQMB311
3. Once submitted please check you are satisfied with the uploaded document
via the submission link.
4. If you experience technical difficulties and are unable to upload your
assessment by the deadline, please collate evidence of the technical issue
and submit a mitigating circumstances form (MCF). Remember that the
evidence must clearly show timestamps and proof that you attempted to
upload your assessment before the deadline.
6QQMB311
2
Marking Criteria
A summary of what the examiners are looking for in part A of each question.
Criteria Weighting Requirement
Understanding 10%
How well you show understanding of the key
concepts from academic literature surrounding
behavioural finance, behavioural economics and
psychology more generally.
Synthesis of Evidence 15%
How well you are able to use key findings from
published literature on the topic to support your
answer.
Application 10% How well you apply your answer to the question
and case study provided.
Critical Reflection 10%
How well you are able to critically discuss and
debate the important nuances within the
question and the related research.
Use of Examples 10%
Your ability to demonstrate understanding by
linking the academic literature to real world
or hypothetical examples from the case study or
examples from the literature to support
your answer.
Clarity of Expression
and Organisation: 5% How well you organise your answer in a clear
and logical way
Total for part A 60% (Equivalent to 20 marks)
A summary of what the examiners are looking for in part B of each question.
Criteria Weighting Requirement
Understanding 10%
How well you show understanding of the key
concepts from academic literature surrounding
behavioural finance, behavioural economics and
psychology more generally in your
recommendation.
Synthesis of Evidence 15%
How well you are able to use key findings from
published literature on the topic to support your
answer.
Application 10% How well you apply your recommendations to
your client and the case study provided.
Clarity of Expression
and Organisation: 5% How well you organise your answer in a clear
and logical way
Total for part B 40% (Equivalent to 13 marks)

While three questions equate to 99 marks (as equally weighted questions),
marks for the three questions will be scaled and awarded out of 100%.
6QQMB311
3
Question 1
Would you like to do more to help others Despite nearly 50% of U.S.
employers and 70% in the U.K. providing paid volunteer leave, only about 15%
of employees actually use it. This presents a puzzling question about human
behaviour and our willingness to help others. Most people would say they are
in favour of helping others, yet when provided with opportunities to take paid
leave to do it, surprisingly few take up the opportunity.
How do we solve this puzzle Some suggest that simplifying the volunteering
process is key, making opportunities as accessible as possible. Apps such as
OnHand are seeking to solve some of these issues by connecting employees
with quick and easy ways to contribute, like mentoring or donating food.
However this only solves the supply side, there’s often a disconnect between
what employees are drawn to, which is often simple and enjoyable
volunteering activities—and what charities truly need, the demand side,
which often requires specialised skills, participation in less enjoyable tasks
and often long-term and reliable commitment.
Therefore, for corporate volunteer programmes to have more impact, there
is a need to meet both employee interests and charity needs. By aligning these
and tapping into behavioural insights, companies could turn underused
volunteer leave into a powerful force for good in society.
Adopting the role of a behavioural consultant advising the app OnHand, who
is seeking to solve some of these issues, please answer the following two
questions as if you were advising this client:
a) Critically review and draw insights from the academic literature from
behavioural economics, behavioural finance and psychology, to provide
insights to offer your explanation on why corporate volunteer
programmes are currently underutilised by the majority of employees.
(20 marks, suggested word count 300-600 words)
b) Building upon your answer within part a, but not repeating, make a
recommendation of a nudge designed to encourage people to donate
their time more to volunteering.
(13 marks, suggested word count 200-400 words)
Total marks for Question 1 (33 marks)
See Next Page
6QQMB311
4
Question 2
Although passive investing through index funds and ETFs has grown
significantly in recent years, most of the stock market remains actively
managed. As of 2020, passive investors held 37.8% of the U.S. stock market,
meaning that 62.2% is still under active management. Despite this, evidence
that active investing consistently generates superior returns, or “alpha,” is
limited, and those few who do succeed often manage closed funds. Numerous
studies have shown that most active fund managers fail to outperform their
benchmarks, particularly when accounting for the high fees and expenses they
charge.
In contrast, passive investing simply tracks market indexes, leading to lower
fees and, on average, higher returns for investors. This raises an interesting
puzzle in finance: active investments often underperform but still command
substantial fees. For example, in 2021, listed U.S. asset managers had an
average profit margin of nearly 26%, more than double the S&P 500’s average.
Yet despite often costing more and providing less return, active management
continues to dominate, with 62.2% of investors choosing active managers. This
begs the question: why does active management persist despite evidence of
its underperformance and high cost
Adopting the role of a behavioural consultant advising Vanguard, please
answer the following two questions as if you were providing your analysis to
this client:
a) Provide a critical review of academic literature from the fields of
behavioural economics, behavioural finance, and psychology. Focus on
the behavioural insights and offer a behavioural theory that you think
best explains why many institutions and private investors prefer to
entrust their money to active fund managers rather than opting for
passive investment in index funds. Please focus on one specific bias you
think might explain this phenomenon.
(20 marks, suggested word count 300-600 words)
b) Building upon your answer within part a, but not repeating, make a
recommendation of a nudge, designed to nudge investors to review
active fund managers performance relative to benchmarks, while also
factoring in their fees.
(13 marks, suggested word count 200-400 words)
Total marks for Question 2 (33 marks)
See Next Page
6QQMB311
Question 3
Nvidia’s share price has skyrocketed nearly 1,000% over the past two years,
placing it among the world’s top three most valuable companies. This rapid
ascent has sparked a key debate among financial analysts: is Nvidia’s valuation
justified, or overinflated
Critics argue that Nvidia is entering “bubble territory,” citing its reliance on
Big Tech’s GPU spending and questioning the wider economy’s readiness for
widespread AI adoption. They highlight that many AI applications may remain
costly due to high energy consumption or lack reliability for critical uses due
to ‘hallucinations’. Furthermore, they note that AI has yet to produce
significant productivity gains beyond automating mundane tasks. Sceptics
contend that a single disappointing earnings report could burst the “hype
cycle” and deflate the bubble.
Conversely, bullish analysts highlight Nvidia’s dominant 80–85% share in AI
chips and significant growth potential in accelerated computing. They
emphasise strong partnerships with firms like Accenture and Oracle, and a
robust software portfolio. Supporters argue that despite high valuations,
projected earnings growth and an anticipated $200 billion in free cash flow
over the next two years make Nvidia an attractive investment. They believe
the company is well-positioned to capitalise on the expanding AI market,
justifying its current valuation.
Adopting the role of a behavioural consultant advising the world’s largest
pension fund, the Government Pension Investment Fund (GPIF) of Japan about
investing in Nvidia, please answer the following two questions as if you were
providing your analysis to this client:
a) Critically review the academic literature from behavioural finance on
financial bubbles to support your view on whether Nvidia’s current
valuation is justified or if it exhibits the characteristics of a bubble.
Ensure you use research on bubbles to support your position, whether
for or against. Regardless of your viewpoint, please critically reflect on
why it is challenging to truly determine if something is overvalued or
not. (20 marks, suggested word count 300-600 words)
b) Building upon your answer within part a, but not repeating, make a
recommendation of a nudge designed to alert fund managers to
potentially overvalued investments.
(13 marks, suggested word count 200-400 words)
Total marks for Question 3 (33 marks)
See Next Page
5
6QQMB311
Question 4
John Foley, the co-founder of Peloton, has witnessed a substantial drop in his
wealth over the past three years. His stake in Peloton, once valued at
approximately $1.9 billion in early 2021, is now worth just $22 million. In
other words, his net worth has decreased to less than 2% of its pandemic peak.
Despite this significant decline in personal wealth, Foley remains upbeat
about his future, suggesting that his best business years are still ahead. He
has recently launched a new venture called Ernesta, a custom-fitted rug
company based in New York, which is backed by some of Peloton’s early
investors. His unwavering confidence mirrors a broader trend among
technology entrepreneurs who maintain a positive outlook despite previous
setbacks.
For those investing in Ernesta, the question is whether Foley’s optimism is
justified, especially given the dramatic change in his fortunes. His attitude
reflects a mindset towards setbacks that is widely promoted in
entrepreneurial circles. In the venture capital-driven business environment,
grand visions are encouraged, and financial setbacks are often reframed as
stepping stones—sometimes seen as a badge of honour and part of the path to
success.
Adopting the perspective of a behavioural consultant advising
venture capitalists investing in Ernesta, please answer the following two
questions as if you were providing your analysis to this client:
a) Please critically review academic literature in behavioural finance on
overconfidence and excessive optimism, explaining why psychologists
believe humans tend to exhibit these traits. Considering these insights,
discuss whether Foley’s past setbacks would make you, as a venture
capitalist, more or less likely to invest in his new venture. Is confidence
and optimism always a bad thing Ensure you support your answer with
evidence from behavioural literature.
(20 marks, suggested word count 300-600 words)
b) Building upon your answer in part a (without repeating it), please
recommend a “nudge” designed to prevent escalation of commitment if
early investments in Ernesta does not yield sufficient returns. As to
nudge the venture capitalists to avoid further investment, as to
prevent ‘throwing good money after bad’.
(13 marks, suggested word count 200-400 words)
Total marks for Question 4 (33 marks)
See Next Page
6
6QQMB311
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Question 5
Recent Barclays data reveals a preference among the majority of Britons for
holding cash over investing, with over ￡430 billion in excess savings that could
otherwise be invested. This trend highlights a strong inclination toward cash’s
perceived safety, alongside an overestimation of the risks associated with
investing. Many overlook the gradual erosion of cash value due to inflation.
According to the Financial Conduct Authority (FCA), 8.6 million UK residents
hold over ￡10,000 in cash, with half potentially benefiting from investing, as
its cash unused.
The FCA identifies several reasons for high cash savings, including the rise in
interest rates, a buildup of household savings post-COVID-19, and gaps in
financial literacy around investing. Many people fear losing money and find
investing complex, while financial advice often appears costly and tailored
for the wealthy due to high advisory fees.
To address these concerns, the FCA plans to ease regulations, allowing
companies to offer more affordable financial guidance. They aim to close the
advice gap by promoting broader educational resources and increased access
to market analysis. This initiative is intended to help individuals feel more
confident about shifting excess cash to investments, increasing their wealth
and unlocking economic growth.
Adopting the perspective of a behavioural consultant advising the Financial
Conduct Authority (FCA) on behavioural insights resulting in an aversion to
investing in equity market, please answer the following two questions as if
you were providing your analysis to this client:
a) Critically evaluate, using academic literature from behavioural
economics, behavioural finance, and psychology, whether in your view
increasing the availability of educational materials and information will
be crucial in encouraging more people to invest their cash savings in the
stock market Does the evidence support the effectiveness of financial
education in promoting investing Additionally, suggest one behavioural
finance theory beyond financial education that the Financial Conduct
Authority (FCA) should consider, to also understand why people are
often hesitant to invest their cash savings in equities.
(20 marks, suggested word count 300-600 words)
b) Building upon your answer within part a, but not repeating, make a
recommendation of a nudge designed to encourage people to move
some of their existing cash savings into the stock market.
(13 marks, suggested word count 200-400 words)
End of Paper Total marks for Question 5 (33 marks)