Connect with us

Innovation

Book Review: Behavioral Finance and Investor Types: Managing Behavior to Make Better Investment Decisions

Published

Screen Shot 2015-02-12 at 7.11.19 AM.png

Behavioral Finance and Investor Types: Managing Behavior to Make Better Investment Decisions – Michael M. Pompian, John Wiley & Sons, Inc., New Jersey, 2012

So much of the content around Behavioral Finance and Neuro Economics is simply new information. Albeit valuable information it often leaves both the practitioner and the individual investor left without an answer to the question, “so what do i do?” Pompian combines his research and insights into our fundamental cognitive and emotional biases together with research and insights into fundamental personality types. By doing this he has created easy to use archetypes and provides concrete, practical action steps for advisors and individual investors to use in order to avoid making big mistakes.

The genuine value in this work is that Pompian provides a framework for how to treat biases in the asset allocation decision. Pompian’s work truly aligns the higher purpose of the financial advice business. For the practitioner, the application of this work is really about improving the quality of the advice. The framework provides guidelines for how to answer these two central questions. First, when should and advisor attempt to moderate the way a client naturally behaves in order to counteract the effects of behavioral biases so that they can fit a predetermined asset allocation. ie. The recommended portfolio. Second, and alternatively to the first, when should advisors create asset allocations that adapt to clients’ biases so that clients can comfortably abide by their asset allocation decision.

This is practical, usable and valuable. A must for anyone who professes to be a financial advisor.

 

Continue Reading

Trending