Behavioral Finance and Wealth Management: How to Build Optimal Portfolios That Account for Investor Biases
Behavioral Finance and Wealth ManagementHow to Build Investment Strategies That Account for Investor BiasesSince the first edition of Behavioral Finance and Wealth Management was published—in the wake of the bursting of the technology bubble in 2000—the world faced yet another economic crisis in 2008. Accompanying this crisis is a new level of market volatility, and both investors and advisors can benefit from a deeper understanding of behavioral finance and how it can help them achieve their long-term financial goals. That's why author Michael Pompian, a wealth manager and practitioner at the forefront of the practical application of behavioral finance, has written the second edition of this book.As an investment advisor, Pompian understands the behavioral biases that investors have. He has discovered specific ways to adjust investment strategies for these biases and in the Second Edition of Behavioral Finance and Wealth Management, Pompian helps investors and their advisors develop a heightened awareness of these biases so that financial decisions, and resulting economic outcomes, can be improved.Divided into six comprehensive parts, this reliable guide opens with an introduction to the basics of behavioral finance, focusing on the aspects most relevant to individual wealth management. From here, Parts Two (Belief Perseverance Biases), Three (Information Processing Biases), and Four (Emotional Biases) define and illustrate a total of twenty of the most important biases—within the cognitive-emotional framework—for considering potential biases. For each of the twenty biases, Pompian uses the same basic format in discussing the bias, in order to promote greater accessibility.After covering the foundations of behavioral finance, the biases, Part Five turns to the main focus of this book: practical application of behavioral finance for investors and advisors. This section establishes a basic framework for integrating behavioral finance insights into portfolio structure and presents the concept of best practical allocation. It then takes the concepts presented and applies them in a case study format to reinforce learning.Rounding out this detailed discussion, Part Six ties together many of the concepts covered in the book and introduces a new concept Pompian has developed to make behavioral finance easier to apply in practice. The idea of Behavioral Investor Types (BITs) is introduced along with the investment biases that are associated with each one.Updated to reflect current market conditions, this reliable resource skillfully illustrates investors' behavioral biases in detail and offers financial advisors and their clients practical advice about how to apply the science of behavioral finance to improve overall investment decision making.