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

by Pompian, Michael M.

• ISBN13: 9781118011508
• ISBN10: 1118011503
• Edition: 1st
• Format: Hardcover
• Copyright: 2012-07-03
• Publisher: Wiley

Summary

Achieve investing success by understanding your behavior type This groundbreaking book shows how to invest wisely by managing your behavior, and not just your money. Step by step, Michael Pompian (a leading authority in the practical application of Behavioral Finance concepts to wealth management) helps you plan a strategy targeted to your personality. The book includes a test for determining your investment type and offers strategies you can put into use when investing. It also includes a brief history of the stock market, and easy-to-comprehend information about stocks and investing to help you lay a solid foundation for your investment decisions. Behavioral Finance and Investor Types is divided into two parts. Test Your Type, gives an overview of Behavioral Finance as well as the elements that come into play when figuring out BIT, like active or passive traits, risk tolerance, and biases. The book includes a quiz to help you discover what category you are in. Plan and Act, contains the traits common to your type; an analysis of the biases associated with your type; and strategies and solutions that compliment and capitalize on your BIT. Offers a practical guide to an investing strategy that fits both your financial situation and your personality type Includes a test for determining your tolerance for risk and other traits that will determine your investment type Written by the Director of the Private Wealth Practice for Hammond Associates-an investment consulting firm serving institutional and private wealth clients Behavioral Finance and Investor Types offers investors a better sense of what drives them and what puts on their breaks. By using the information found here, you'll quickly become savvy about the world of investing because you'll come to understand your place in it.

Author Biography

MICHAEL M. POMPIAN, CFA, CAIA, CFP, is a partner at Mercer Investment Consulting (formerly Hammond Associates) serving institutional and private wealth clients. Prior to joining Mercer, he worked at Merrill Lynch and PNC Private Bank, as well as the investment staff of a family office. Pompian holds the Chartered Financial Analyst (CFA) designation, is a Chartered Alternative Investment Analyst (CAIA) and a Certified Financial Planner (CFP). He is also a member of the CFA Institute (formerly AIMR) and the New York Society of Security Analysts (NYSSA). He holds a BS in management from the University of New Hampshire and an MBA from Tulane University. He is a regular speaker on the subject of behavioral finance and has published numerous articles on the subject. He is married with three sons and can be reached at [e-mail].

Table of Contents

Foreword	p. xi
Preface	p. xiii
Acknowledgments	p. xxi
Introduction to Behavioral Finance	p. 1
Why Reaching Financial Goals Is Difficult	p. 3
Nonfinancial Examples of Self-Defeating Behavior	p. 4
Financial Examples of Self-Defeating Behavior	p. 8
Summary	p. 11
Notes	p. 12
Overview of Behavioral finance	p. 13
Behavioral Finance: Micro versus Macro	p. 14
Standard Finance versus Behavioral Finance	p. 15
The Role of Behavioral Finance with Private Clients	p. 22
Practical Applications	p. 22
Notes	p. 24
The Building Blocks: Behavioral Biases	p. 25
Cognitive Biases	p. 27
Emotional Biases	p. 38
Summary	p. 43
Notes	p. 44
Personality Theory	p. 45
Introduction to Personality Theory	p. 47
History of Personality Theory	p. 48
Four Main Personality Theories	p. 50
Notes	p. 65
The History of Personality Testing	p. 67
Types of Personality Tests	p. 67
Summary	p. 77
Notes	p. 77
The Behavioral investor Type Framework	p. 79
Reviewing the Original Process	p. 81
The Behavioral Alpha Process: A Top-Down Approach	p. 81
Updates to the Previous Model	p. 85
Updated BIT Theory and Application	p. 87
Summary	p. 89
Behavioral Investor Type Diagnostic Testing	p. 91
Step 1: BIT Orientation Quiz	p. 92
Step 2: Bias Identification Quiz	p. 94
Summary	p. 100
Explanation of the Behavioral Investor Types	p. 101
The Preserver	p. 103
Upside/Downside Analysis	p. 104
Bias Analysis	p. 105
Other Biases	p. 107
Advice for Preservers	p. 109
The Follower	p. 111
Upside/Downside Analysis	p. 112
Bias Analysis	p. 113
Other Biases	p. 117
Advice for Followers	p. 119
The Independent	p. 121
Upside/Downside Analysis	p. 122
Bias Analysis	p. 123
Advice for Independents	p. 133
The Accumulator	p. 135
Upside/Downside Analysis	p. 136
Bias Analysis	p. 137
Other Biases	p. 141
Advice for Accumulators	p. 144
Plan and Act	p. 147
Capital Markets and Asset Classes	p. 149
Overview of Asset Classes	p. 150
Publicly Traded Equity Investments (Stocks)	p. 154
Fixed Income Investments (Bonds)	p. 163
Hedge Funds	p. 172
Real Assets	p. 176
Simple Portfolio Construction	p. 180
Summary	p. 182
Notes	p. 182
What Is Asset Allocation?	p. 183
The Importance of Assumptions	p. 185
The Importance of Strategic Asset Allocation	p. 186
Considerations for Individual Investors	p. 188
Why Asset Allocation Is So Important	p. 197
Summary	p. 200
Notes	p. 200
Financial Planning: A Crucial Step	p. 201
What Is Financial Planning?	p. 202
Working with a Financial Planner	p. 203
What Is a Certified Financial Planner?	p. 205
Who Can Provide Financial Planning Services?	p. 209
Summary	p. 212
Notes	p. 213
Investment Advice for Each Behavioral Investor Type	p. 215
Foundations of Best Practical Allocation	p. 216
Guidelines for Determining When to Moderate and When to Adapt	p. 217
Best Practical Allocation for Preservers	p. 219
Best Practical Allocation for Followers	p. 222
Best Practical Allocation for Independents	p. 224
Best Practical Allocation for Accumulators	p. 227
Summary	p. 229
Note	p. 230
Index	p. 231
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