Behavioral finance and your portfolio : managing your biases to make better investment decisions

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. Cover 1 Title Page 3 Copyright Page 4 Contents 9 Preface 17 Acknowledgments 23 Part One Introduction to Behavioral Finance 27 Chapter 1 What Is Behavioral Finance and Why Does It Matter? 29 Why Behavioral Finance Matters 31 Behavioral Finance: The Big Picture 32 Standard Finance versus Behavioral Finance 41 Chapter 2 Introduction to Behavioral Biases 49 Introduction 49 Behavioral Biases Defined 50 Why Understanding and Identifying Behavioral Biases Is Crucial 51 Categorization of Behavioral Biases 53 Differences between Cognitive and Emotional Biases 53 Difference among Cognitive Biases 54 Emotional Biases 55 A Final Word on Biases 57 Part Two Belief Perseverance Biases Defined and Illustrated 59 Chapter 3 Belief Perseverance Bias #1: Cognitive Dissonance Bias 61 Bias Description 61 Am I Subject to Cognitive Dissonance Bias? 64 Investment Advice 65 Chapter 4 Belief Perseverance Bias #2: Conservatism Bias 67 Bias Description 67 Am I Subject to Conservatism Bias? 70 Investment Advice 71 Chapter 5 Belief Perseverance Bias #3: Confirmation Bias 73 Bias Description 73 Am I Subject to Confirmation Bias? 77 Investment Advice 78 Chapter 6 Belief Perseverance Bias #4: Representativeness Bias 81 Bias Description 81 Examples of Representativeness Bias 82 Am I Subject to Representativeness Bias? 86 Investment Advice 88 Chapter 7 Belief Perseverance Bias #5: Illusion-of-Control Bias 91 Bias Description 91 Example of Illusion of Control Bias 92 Am I Subject to Illusion of Control Bias? 95 Investment Advice 96 Chapter 8 Belief Perseverance Bias #6: Hindsight Bias 99 Bias Description 99 Example of Hindsight Bias 100 Am I Subject to Hindsight Bias? 102 Investment Advice 103 Part Three Information Processing Biases Defined and Illustrated 105 Chapter 9 Information Processing Bias #1: Mental Accounting Bias 107 Bias Description 107 Practical Application 109 Am I Subject to Mental Accounting Bias? 111 Investment Advice 114 Chapter 10 Information Processing Bias #2: Anchoring Bias 117 Bias Description 117 Example of Anchoring and Bias 118 Am I Subject to Anchoring Bias? 120 Investment Advice 121 Bonus Discussion: Investment Strategies That Leverage Anchoring Bias 122 Chapter 11 Information Processing Bias #3: Framing Bias 125 Bias Description 125 Example of Framing Bias 127 Am I Subject to Framing Bias? 131 Investment Advice 133 Chapter 12 Information Processing Bias #4: Availability Bias 135 Bias Description 135 Example of Availability Bias 136 Am I Subject to Availability Bias? 139 Investment Advice 140 Chapter 13 Information Processing Bias #5: Self-Attribution Bias 143 Bias Description 143 Example of Self-Attribution Bias 144 Am I Subject to Self-Attribution Bias? 145 Investment Advice 147 Chapter 14 Information Processing Bias #6: Outcome Bias 149 Bias Description 149 Am I Subject to Recency Bias? 151 Chapter 15 Information Processing Bias #7: Recency Bias 155 Bias Description 155 Example of Recency Bias 156 Am I Subject to Recency Bias? 160 Investment Advice 161 Part Four Emotional Biases Defined and Illustrated 163 Chapter 16 Emotional Bias #1: Loss Aversion Bias 165 Bias Description 165 Example of Loss Aversion Bias 166 Am I Subject to Loss Aversion Bias? 168 Investment Advice 170 Chapter 17 Emotional Bias #2: Overconfidence Bias 171 Bias Description 171 Examples of Overconfidence Bias 172 Am I Subject to Overconfidence Bias? 174 Investment Advice 177 A Final Word on Overconfidence 179 Chapter 18 Emotional Bias #3: Self-Control Bias 181 Bias Description 181 Example of Self-Control Bias 182 Am I Subject to Self-Control Bias? 185 Investment Advice 186 Chapter 19 Emotional Bias #4: Status Quo Bias 189 Bias Description 189 Example of Status Quo Bias 190 Am I Subject to Status Quo Bias? 191 Investment Advice 193 Chapter 20 Emotional Bias #5: Endowment Bias 195 Bias Description 195 Example of Endowment Bias 196 Am I Subject to Endowment Bias? 198 Investment Advice 199 Chapter 21 Emotional Bias #6: Regret Aversion Bias 201 Bias Description 201 Example of Regret Bias 202 Am I Subject to Regret Bias? 205 Advice 206 Chapter 22 Emotional Bias #7: Affinity Bias 209 Bias Description 209 Example of Affinity Bias 210 Am I Subject to Affinity Bias? 212 Investment Advice 214 Part Five Behavioral Investor Types 215 Chapter 23 Staying on Target to Reach Financial Goals Is Hard 217 Non-Financial Examples of Self-Defeating Behavior 218 Financial Examples of Self-Defeating Behavior 222 Chapter 24 Introduction to Behavioral Investor Types 227 Introduction 227 What Is My Behavioral Investor Type? 230 Step 1: BIT Orientation Quiz 231 Step 2: Bias Identification Quiz 236 Step 3: Advice for Each BIT 242 Summary 242 Chapter 25 Preserver Behavioral Investor Type 243 Upside/Downside Analysis 245 Bias Analysis of Preservers 246 Advice for Preservers 250 Chapter 26 Follower Behavioral Investor Type 251 Upside/Downside Analysis 253 Bias Analysis of Followers 254 Other Important Follower Biases: Hindsight, Cognitive Dissonance, and Regret 258 Advice for Followers 259 Chapter 27 Independent Behavioral Investor Type 261 Upside/Downside Analysis 263 Bias Analysis of Independents 264 Self-Attribution 266 Conservatism Bias 267 Representative Bias 268 Advice for Independents 268 Chapter 28 Accumulator Behavioral Investor Type 269 Upside/Downside Analysis 271 Accumulator Bias Analysis 272 Advice for Accumulators 277 Chapter 29 Asset Allocation Case Studies for Each Behavioral Investor Type 279 Part Six Behavioral Aspects of Portfolio Implementation 297 Chapter 30 Behavioral Finance Aspects of the Active versus Passive Debate 299 The Logic of Passive Management 300 The Potential Benefits of Active Management 300 Advice: Use the Best Practical Allocation for Your Portfolio 303 Chapter 31 Behaviorally Aware Portfolio Construction 305 Introduction 305 Goals-Based Investing 306 Consolidating Accounts into a Portfolio View 307 Portfolio Approach 308 Chapter 32 Behavioral Finance and Market Corrections 311 The Most Recent Panic 312 Index 317 EULA 323 C ognitive and emotional biases can wreak havoc with investor portfolios. Poor investment decision making caused by behavioral errors, especially in times of high market volatility, leads to poor financial outcomes - a material problem for both new and experienced investors. Whether you're mired in loss aversion, suffer from anchoring bias or you're sorting your portfolio into various mental accounts, investor biases will prevent you from maximizing your wealth. But you can learn to challenge your own biases and prevent costly investment errors! In Behavioral Finance and Your Portfolio , veteran investor and advisor Michael M. Pompian delivers a thorough grounding in the most important investor biases you're likely to encounter when making crucial investment decisions. Perhaps the most critical insight, knowing the difference between emotional and cognitive biases, will help you understand what makes you tick as an investor. Full of case studies and quizzes, this book will help you identify and diagnose your own biases. You will become a better investor, even as you deal with the stresses of investing in the real world. You'll learn to take control of your decision-making even when challenging markets can push fear or greed to uncomfortable levels. You'll also discover how to analyze your options, either alone or alongside your investment advisor, as well as how to make better investment decisions overall--and the benefits of backing up those decisions with hard data. . Relying on his decades of experience in financial markets as both an investor and advisor, Pompian shows you how to understand your unique behavioral investor type, and how to improve decisions based on your individual tendencies. Perfect for individual investors, financial advisors, portfolio managers and other financial professionals, Behavioral Finance and Your Portfolio will earn a place in the library of any conscientious investor hoping to gain perspective on cognitive patterns and biases that may be impairing their ability to achieve the best possible return on their investments. "The topic of investor biases and their potential negative impact on investor performance has not lost its appeal since Pompian first book, Behavioral Finance and Wealth Management, was first published in 2006. Pompian's thought leadership in the space has attracted the Investments and Wealth Institute and the CFA Institute to actively make use of his exceptional content over time. Behavioral finance, again, is a key topic for wealth managers and their clients due to the Coronavirus bear market and human decision-making based on fear and greed."-- Provided by publisher