Behavioral Finance And Wealth L Management

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BehavioralFinance and WealthLManagementHow to Build Investment StrategiesThat Account for Investor BiasesSecond EditionMICHAEL M. POMPIANWILEYJohn Wiley &; Sons, Inc.

ContentsPrefaceXVxxiiiIntroduction to Behavioral FinanceCHAPTER1What Is Behavioral Finance?Behavioral Finance: The Big PictureStandard Finance versus Behavioral FinanceThe Role of Behavioral Finance with Private ClientsHow Practical Application of Behavioral Finance Can Create aSuccessful Advisory RelationshipNotesiCHAPTER 2The History of Behavioral Finance MicroHistorical Perspective on the Link between Psychologyand EconomicsModern Behavioral FinancePsychographic Models Used in Behavioral FinanceNotesCHAPTERSIntroduction to Behavioral BiasesIntroductionBehavioral Biases DefinedWhy Understanding and Identifying Behavioral BiasesIs ImportantCategorization of Behavioral BiasesDifferences between Cognitive and Emotional BiasesDifference among Cognitive Biases1s412191921232327364043434445464647vii

VliiCONTENTSEmotional BiasesA Final Word on BiasesSummary of Part One'Belief Perseverance Biases Defined and Illustrated48495051CHAPTER 4Cognitive Dissonance Bias58Bias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceConclusionNotes53555759606262CHAPTER 5Conservatism Bias Bias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceNotesCHAPTERSConfirmation Bias6863646769707178Bias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceNotes737577818384CHAPTER 7Representativeness Bias85Bias DescriptionPractical ApplicationResearch Review858789

ContentsDiagnostic TestingAdviceNotesCHAPTER 8llhinlmi nf PAHIIHII DBoaillusionoi uoniroi masBias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceFinal ThoughtNotesCHAPTERSHindsight BiasBias DescriptionPractical ApplicationResearch ReviewDiagnostic Testing, 08109112113114PART THREEInformation Processing Biases Defined and IllustratedOverview of the Structure of Chapters 10 through 16CHAPTER 1 0Mental Accounting BiasBias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceThe Behavioral Finance Approach to Asset Allocationbased on Mental ER 11Anchoring and Adjustment Bias135Bias DescriptionPractical Application135136

XCONTENTSResearch ReviewDiagnostic TestingAdviceBonus Discussion: Investment Strategies that LeverageAnchoring and Adjustment BiasNotesCHAPTER 1 2Framing BiasBias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceNotesCHAPTER 13Availability BiasBias DescriptionPractical ApplicationResearch ReviewDiagnostic TestAdviceNotesCHAPTER 1 4Self-Attribution BiasBias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceNotesCHAPTER 15Outcome BiasBias 0171173173176178

ContentsCHAPTER 16Recency BiasXl,Bias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceNotes178179181184185187188PART FOUREmotional Biases Defined and IllustratedCHAPTER 17Loss Aversion BiasBias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceNotesCHAPTERJ8Overconfldence BiasBias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceA Final Word on OverconfidenceNotesCHAPTER 1 8Ssfl-Contpof BiasBias DescriptionPractical ApplicationResearch ReviewDiagnostic 1203206208208211211214216219220222

CONTENTSCHAPTER 20Status Quo BiasBias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceNotesCHAPTER 21Endowment BiasBias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceNotesCHAPTER 22Regret Aversion Bias/Bias DescriptionPractical ApplicationResearch ReviewDiagnostic TestingAdviceNotesCHAPTER 23Affinity BiasBias DescriptionResearch ReviewDiagnostic TestingAdviceNotesApplication of Behavioral finance to Asset Allocation andCase StudiesCHAPTER 24Application of Behavioral Hnance to Asset AiiocationPractical Application of Behavioral FinanceBest Practical 4266

ContentsGuidelines for Determining Best Practical Asset AllocationQuantitative Guidelines for Incorporating Behavioral Financein Asset AllocationInvestment Policy and Asset AllocationNotesCHAPTER 25Case StudiesCase Study A: Mr. NicholasCase Study B: Mrs. AlexanderSummary of Case Studies267269271271273.276281286EHTJH Behavioral Investor TypesCHAPTER 26Behavioral Investor Type Diagnostic ProcessBackground of the Development of Behavioral Investor TypesPsychographic Models of Investor BehaviorEarly Psychographic ModelsThe Behavioral Alpha Process: A Top-Down ApproachThe BIT Identification ProcessSummaryNeftesCHAPTER 27Behavioral investor 1302305308312315317

Introduction to Behavioral Finance CHAPTER1 What Is Behavioral Finance? Behavioral Finance: The Big Picture Standard Finance versus Behavioral Finance The Role of Behavioral Finance with Private Clients How Practical Application of Behavioral Finance Can Create a Successful Advisory Rel