Preface xv
Acknowledgments xxiii
PART ONE Introduction to Behavioral Finance 1
CHAPTER 1 What Is Behavioral Finance? 3
Behavioral Finance: The Big Picture 4
Standard Finance versus Behavioral Finance 12
The Role of Behavioral Finance with Private Clients 19
How Practical Application of Behavioral Finance Can Create a Successful Advisory Relationship 19
Notes 21
CHAPTER 2 The History of Behavioral Finance Micro 23
Historical Perspective on the Link between Psychology and Economics 23
Modern Behavioral Finance 27
Psychographic Models Used in Behavioral Finance 36
Notes 40
CHAPTER 3 Introduction to Behavioral Biases 43
Introduction 43
Behavioral Biases Defined 44
Why Understanding and Identifying Behavioral Biases Is Important 45
Categorization of Behavioral Biases 46
Differences between Cognitive and Emotional Biases 46
Difference among Cognitive Biases 47
Emotional Biases 48
A Final Word on Biases 49
Summary of Part One 50
PART TWO Belief Perseverance Biases Defined and Illustrated 51
CHAPTER 4 Cognitive Dissonance Bias 53
Bias Description 53
Practical Application 55
Research Review 57
Diagnostic Testing 59
Advice 60
Conclusion 62
Notes 62
CHAPTER 5 Conservatism Bias 63
Bias Description 63
Practical Application 64
Research Review 67
Diagnostic Testing 69
Advice 70
Notes 71
CHAPTER 6 Confirmation Bias 73
Bias Description 73
Practical Application 75
Research Review 77
Diagnostic Testing 81
Advice 83
Notes 84
CHAPTER 7 Representativeness Bias 85
Bias Description 85
Practical Application 87
Research Review 89
Diagnostic Testing 93
Advice 94
Notes 97
CHAPTER 8 Illusion of Control Bias 99
Bias Description 99
Practical Application 100
Research Review 103
Diagnostic Testing 104
Advice 105
Final Thought 106
Notes 106
CHAPTER 9 Hindsight Bias 107
Bias Description 107
Practical Application 108
Research Review 109
Diagnostic Testing 112
Advice 113
Notes 114
PART THREE Information Processing Biases Defined and Illustrated 117
Overview of the Structure of Chapters 10 through 16 117
CHAPTER 10 Mental Accounting Bias 119
Bias Description 119
Practical Application 121
Research Review 123
Diagnostic Testing 128
Advice 130
The Behavioral Finance Approach to Asset Allocation based on Mental Accounting 133
Notes 134
CHAPTER 11 Anchoring and Adjustment Bias 135
Bias Description 135
Practical Application 136
Research Review 138
Diagnostic Testing 139
Advice 140
Bonus Discussion: Investment Strategies that Leverage Anchoring and Adjustment Bias 141
Notes 142
CHAPTER 12 Framing Bias 143
Bias Description 143
Practical Application 145
Research Review 148
Diagnostic Testing 150
Advice 152
Notes 153
CHAPTER 13 Availability Bias 155
Bias Description 155
Practical Application 157
Research Review 160
Diagnostic Test 162
Advice 163
Notes 164
CHAPTER 14 Self-Attribution Bias 165
Bias Description 165
Practical Application 166
Research Review 167
Diagnostic Testing 169
Advice 170
Notes 171
CHAPTER 15 Outcome Bias 173
Bias Description 173
Diagnostic 176
Notes 178
CHAPTER 16 Recency Bias 179
Bias Description 179
Practical Application 181
Research Review 184
Diagnostic Testing 185
Advice 187
Notes 188
PART FOUR Emotional Biases Defined and Illustrated 189
CHAPTER 17 Loss Aversion Bias 191
Bias Description 191
Practical Application 193
Research Review 194
Diagnostic Testing 195
Advice 196
Notes 197
CHAPTER 18 Overconfidence Bias 199
Bias Description 199
Practical Application 200
Research Review 201
Diagnostic Testing 203
Advice 206
A Final Word on Overconfidence 208
Notes 208
CHAPTER 19 Self-Control Bias 211
Bias Description 211
Practical Application 214
Research Review 216
Diagnostic Testing 219
Advice 220
Notes 222
CHAPTER 20 Status Quo Bias 223
Bias Description 223
Practical Application 224
Research Review 225
Diagnostic Testing 226
Advice 228
Notes 229
CHAPTER 21 Endowment Bias 231
Bias Description 231
Practical Application 232
Research Review 235
Diagnostic Testing 237
Advice 239
Notes 240
CHAPTER 22 Regret Aversion Bias 243
Bias Description 243
Practical Application 244
Research Review 246
Diagnostic Testing 247
Advice 249
Notes 251
CHAPTER 23 Affinity Bias 253
Bias Description 253
Research Review 256
Diagnostic Testing 258
Advice 259
Notes 260
PART FIVE Application of Behavioral Finance to Asset Allocation and Case Studies 261
CHAPTER 24 Application of Behavioral Finance to Asset Allocation 263
Practical Application of Behavioral Finance 264
Best Practical Allocation 266
Guidelines for Determining Best Practical Asset Allocation 267
Quantitative Guidelines for Incorporating Behavioral Finance in Asset Allocation 269
Investment Policy and Asset Allocation 271
Notes 271
CHAPTER 25 Case Studies 273
Case Study A: Mr. Nicholas 276
Case Study B: Mrs. Alexander 281
Summary of Case Studies 286
PART SIX Behavioral Investor Types 287
CHAPTER 26 Behavioral Investor Type Diagnostic Process 289
Background of the Development of Behavioral Investor Types 290
Psychographic Models of Investor Behavior 291
Early Psychographic Models 293
The Behavioral Alpha Process: A Top-Down Approach 295
The BIT Identification Process 296
Summary 299
Notes 300
CHAPTER 27 Behavioral Investor Types 301
Introduction 301
Preserver 302
Follower 305
Independent 308
Accumulator 312
Summary 315
Index 317
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