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Behavioral Finance and Your Portfolio

Release Date: 2021/05/01
ISBN: 9781119801610
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Become a more strategic and successful investor by identifying the biases impacting your decision making.

In Behavioral Finance and Your Portfolio, acclaimed investment advisor and author Michael M. Pompian delivers an insightful and thorough guide to countering the negative effect of cognitive and behavioral biases on your financial decisions. You’ll learn about the “Big Five” behavioral biases and how they’re reducing your returns and leading to unwanted and unnecessary costs in your portfolio.

Designed for investors who are serious about maximizing their gains, in this book you’ll discover how to:

● Take control of your decision-making—even when challenging markets push greed and fear to intolerable levels

● Reflect on how to make investment decisions using data-backed and substantiated information instead of emotion and bias

● Counter deep-seated biases like loss aversion, hindsight and overconfidence with self-awareness and hard facts

● Identify your personal investment psychology profile, which you can use  to inform your future financial decision making

Behavioral Finance and Your Portfolio was created for individual investors, but will also earn a place in the libraries of financial advisors, planners and portfolio managers who are determined to counteract the less principled and data-driven aspects of their decision making.

Table of Contents

  1. Cover
  2. Title Page
  3. Copyright
  4. Dedication
  5. Preface
    1. A Challenging Environment
    2. Why This Book?
    3. Who Should Use This Book?
    4. When to Use This Book
    5. Plan of the Book
  6. Acknowledgments
  7. About the Author
  8. PART I: INTRODUCTION TO BEHAVIORAL FINANCE
    1. 1 What Is Behavioral Finance and Why Does It Matter?
    2. Why Behavioral Finance Matters
    3. Behavioral Finance: The Big Picture
    4. Standard Finance versus Behavioral Finance
    5. Notes
    6. 2 Introduction to Behavioral Biases
    7. Introduction
    8. Behavioral Biases Defined
    9. Why Understanding and Identifying Behavioral Biases Is Crucial
    10. Categorization of Behavioral Biases
    11. Differences between Cognitive and Emotional Biases
    12. Difference among Cognitive Biases
    13. Emotional Biases
    14. A Final Word on Biases
  9. PART II: BELIEF PERSEVERANCE BIASES DEFINED AND ILLUSTRATED
    1. 3 Belief Perseverance Bias #1: Cognitive Dissonance Bias
    2. Bias Description
    3. Am I Subject to Cognitive Dissonance Bias?
    4. Investment Advice
    5. Note
    6. 4 Belief Perseverance Bias #2: Conservatism Bias
    7. Bias Description
    8. Am I Subject to Conservatism Bias?
    9. Investment Advice
    10. Notes
    11. 5 Belief Perseverance Bias #3: Confirmation Bias
    12. Bias Description
    13. Am I Subject to Confirmation Bias?
    14. Investment Advice
    15. 6 Belief Perseverance Bias #4: Representativeness Bias
    16. Bias Description
    17. Examples of Representativeness Bias
    18. Am I Subject to Representativeness Bias?
    19. Investment Advice
    20. Note
    21. 7 Belief Perseverance Bias #5: Illusion-of-Control Bias
    22. Bias Description
    23. Example of Illusion of Control Bias
    24. Am I Subject to Illusion of Control Bias?
    25. Investment Advice
    26. Notes
    27. 8 Belief Perseverance Bias #6: Hindsight Bias
    28. Bias Description
    29. Example of Hindsight Bias
    30. Am I Subject to Hindsight Bias?
    31. Investment Advice
  10. PART III: INFORMATION PROCESSING BIASES DEFINED AND ILLUSTRATED
    1. 9 Information Processing Bias #1: Mental Accounting Bias
    2. Bias Description
    3. Practical Application
    4. Am I Subject to Mental Accounting Bias?
    5. Investment Advice
    6. Notes
    7. 10 Information Processing Bias #2: Anchoring Bias
    8. Bias Description
    9. Example of Anchoring and Bias
    10. Am I Subject to Anchoring Bias?
    11. Investment Advice
    12. Bonus Discussion: Investment Strategies That Leverage Anchoring Bias
    13. 11 Information Processing Bias #3: Framing Bias
    14. Bias Description
    15. Example of Framing Bias
    16. Am I Subject to Framing Bias?
    17. Investment Advice
    18. 12 Information Processing Bias #4: Availability Bias
    19. Bias Description
    20. Example of Availability Bias
    21. Am I Subject to Availability Bias?
    22. Investment Advice
    23. Notes
    24. 13 Information Processing Bias #5: Self-Attribution Bias
    25. Bias Description
    26. Example of Self-Attribution Bias
    27. Am I Subject to Self-Attribution Bias?
    28. Investment Advice
    29. Note
    30. 14 Information Processing Bias #6: Outcome Bias
    31. Bias Description
    32. Am I Subject to Recency Bias?
    33. Note
    34. 15 Information Processing Bias #7: Recency Bias
    35. Bias Description
    36. Example of Recency Bias
    37. Am I Subject to Recency Bias?
    38. Investment Advice
  11. PART IV: EMOTIONAL BIASES DEFINED AND ILLUSTRATED
    1. 16 Emotional Bias #1: Loss Aversion Bias
    2. Bias Description
    3. Example of Loss Aversion Bias
    4. Am I Subject to Loss Aversion Bias?
    5. Investment Advice
    6. Note
    7. 17 Emotional Bias #2: Overconfidence Bias
    8. Bias Description
    9. Examples of Overconfidence Bias
    10. Am I Subject to Overconfidence Bias?
    11. Investment Advice
    12. A Final Word on Overconfidence
    13. Notes
    14. 18 Emotional Bias #3: Self-Control Bias
    15. Bias Description
    16. Example of Self-Control Bias
    17. Am I Subject to Self-Control Bias?
    18. Investment Advice
    19. Note
    20. 19 Emotional Bias #4: Status Quo Bias
    21. Bias Description
    22. Example of Status Quo Bias
    23. Am I Subject to Status Quo Bias?
    24. Investment Advice
    25. Note
    26. 20 Emotional Bias #5: Endowment Bias
    27. Bias Description
    28. Example of Endowment Bias
    29. Am I Subject to Endowment Bias?
    30. Investment Advice
    31. Note
    32. 21 Emotional Bias #6: Regret Aversion Bias
    33. Bias Description
    34. Example of Regret Bias
    35. Am I Subject to Regret Bias?
    36. Advice
    37. 22 Emotional Bias #7: Affinity Bias
    38. Bias Description
    39. Example of Affinity Bias
    40. Am I Subject to Affinity Bias?
    41. Investment Advice
    42. Note
  12. PART V: BEHAVIORAL INVESTOR TYPES
    1. 23 Staying on Target to Reach Financial Goals Is Hard
    2. Non-Financial Examples of Self-Defeating Behavior
    3. Financial Examples of Self-Defeating Behavior
    4. Notes
    5. 24 Introduction to Behavioral Investor Types
    6. Introduction
    7. What Is My Behavioral Investor Type?
    8. Step 1: BIT Orientation Quiz
    9. Step 2: Bias Identification Quiz
    10. Step 3: Advice for Each BIT
    11. Summary
    12. 25 Preserver Behavioral Investor Type
    13. Upside/Downside Analysis
    14. Bias Analysis of Preservers
    15. Advice for Preservers
    16. 26 Follower Behavioral Investor Type
    17. Upside/Downside Analysis
    18. Bias Analysis of Followers
    19. Other Important Follower Biases: Hindsight, Cognitive Dissonance, and Regret
    20. Advice for Followers
    21. 27 Independent Behavioral Investor Type
    22. Upside/Downside Analysis
    23. Bias Analysis of Independents
    24. Self-Attribution
    25. Conservatism Bias
    26. Representative Bias
    27. Advice for Independents
    28. 28 Accumulator Behavioral Investor Type
    29. Upside/Downside Analysis
    30. Accumulator Bias Analysis
    31. Advice for Accumulators
    32. 29 Asset Allocation Case Studies for Each Behavioral Investor Type
  13. PART VI: BEHAVIORAL ASPECTS OF PORTFOLIO IMPLEMENTATION
    1. 30 Behavioral Finance Aspects of the Active versus Passive Debate
    2. The Logic of Passive Management
    3. The Potential Benefits of Active Management
    4. Advice: Use the Best Practical Allocation for Your Portfolio
    5. Notes
    6. 31 Behaviorally Aware Portfolio Construction
    7. Introduction
    8. Goals-Based Investing
    9. Consolidating Accounts into a Portfolio View
    10. Portfolio Approach
    11. 32 Behavioral Finance and Market Corrections
    12. The Most Recent Panic
    13. Note
  14. Index
  15. End User License Agreement
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