Behavioural Finance for Private Banking

by Hens, Thorsten; Bachmann, Kremena

• ISBN13: 9780470779996
• ISBN10: 0470779993
• Format: Hardcover
• Copyright: 2009-03-23
• Publisher: Wiley

Summary

"This book provides advisors of private clients with both the appropriate framework for their task as well as a collection of practical tools to support their work." "The book addresses the many psychological traps (behavioural biases) that are commonly observed along a typical decision-making process and in particular, how these biases differ across different cultures, something which is of vital importance for any bank offering private banking services worldwide. This book will provide valuable insights and will enable practitioners to improve service quality at every step along the wealth management process."--BOOK JACKET.

Author Biography

Thorsten Hens, born in Germany 1961, is SFI Professor of Financial Economics at the University of Zurich’s Swiss Banking Institute, a Fellow of CEPR and Adjunct Professor of Finance at the Norwegian Business School in Bergen. He studied at Bonn and Paris and held professorships in Stanford, Bielefeld and Zurich. Since 2007 he is the Director of the Swiss Banking Institute and since 2003 the scientific coordinator of NCCR-Finrisk. His research areas are -- among others -- behavioural and evolutionary finance. Thorsten Hens is ranked among the top 10 economics professors in the German spoken area (Germany, Switzerland and Austria). In researching how investors make their decisions, Professor Hens draws on work in psychology and applies insights from biology in order to understand the dynamics of financial markets. His consulting experience includes application of behavioural finance for private banking and evolutionary finance for asset management.

Kremena Bachmann, born in Bulgaria in 1976, currently holds a postdoctoral position at the University of Zurich’s Swiss Banking Institute. She received an MS in Finance from the University of St. Gallen (HSG) and a PhD in Finance from the University of Zurich, where she held a research position at the Institute for Empirical Research in Economics. Her research interests are behavioural finance and investment management. Mrs. Bachmann worked on different projects for Credit Suisse Asset Management and Bank Wegelin. Her teaching experience includes lectures on behavioural finance and wealth management at the University of Zurich and the Swiss Training Centre for Investment Professionals (AZEK).

Table of Contents

List of Figures	p. ix
List of Tables	p. xiii
Notation	p. xv
Preface	p. xxi
Introduction	p. 1
The private banking business	p. 1
Current challenges in private banking	p. 3
Improving service quality with behavioural finance	p. 6
Conclusion	p. 9
Decision Theory	p. 11
Introduction	p. 12
Mean-variance analysis	p. 14
Expected utility theory	p. 22
Prospect theory	p. 35
Prospect theory and the optimal asset allocation	p. 50
A critical view on mean-variance theory	p. 59
A critical view on expected utility axioms	p. 63
Comparison of expected utility, prospect theory, and mean-variance analysis	p. 64
Conclusion	p. 65
Behavioural Biases	p. 67
Information selection biases	p. 68
Information processing biases	p. 70
Decision biases	p. 82
Decision evaluation biases	p. 87
Biases in intertemporal decisions	p. 88
Behavioural biases and speculative bubbles	p. 91
Cultural differences in the behavioural biases	p. 95
Risk Profiling	p. 105
Dealing with behavioural biases	p. 105
The risk profiler and its benefits	p. 106
Designing a risk profiler: Some general considerations	p. 108
Implemented risk profilers: Case study of the former Bank Leu	p. 109
A risk profiler based on the mean-variance analysis	p. 114
Integrating behavioural finance in the risk profiler	p. 117
Case study: Comparing risk profiles	p. 127
Conclusion	p. 134
Product Design	p. 135
Case study: "Ladder Pop"	p. 136
Case study: "DAX Sparbuch"	p. 143
Optimal product design	p. 149
Conclusion	p. 155
Dynamic Asset Allocation	p. 157
The optimal tactical asset allocation	p. 158
The optimal strategic asset allocation	p. 171
Conclusion	p. 184
Life Cycle Planning	p. 187
Case study: Widow Kassel	p. 187
Main decisions over time	p. 189
Consumption smoothing	p. 189
The life cycle hypothesis	p. 190
The behavioural life cycle hypothesis	p. 192
The life cycle asset allocation problem	p. 194
The life cycle asset allocation of an expected utility maximizer	p. 195
The life cycle asset allocation of a behavioural investor	p. 198
Life cycle funds	p. 202
Conclusion	p. 206
Structured Wealth Management Process	p. 207
The benefits of a structured wealth management process	p. 209
Problems implementing a structured wealth management process	p. 210
Impact of the new process on conflicts of interests	p. 210
Learning by "cycling" through the process	p. 211
Case study: Credit Suisse	p. 211
Mental accounting in the wealth management process	p. 217
Conclusions	p. 226
Conclusion and Outlook	p. 229
Recapitulation of the main achievements	p. 229
Outlook of further developments	p. 229
References	p. 231
Index	p. 237
Table of Contents provided by Ingram. All Rights Reserved.