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Behavioral Finance and Wealth Management
How to Build Investment Strategies That Account for Investor Biases
Since the first edition of Behavioral Finance and Wealth Management was publishedin the wake of the bursting of the technology bubble in 2000the 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 biaseswithin the cognitive-emotional frameworkfor 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.
Praise for the first edition of Behavioral Finance and Wealth Management
"Pompian is handing you the magic book, the one that reveals your behavioral flaws and shows you how to avoid them. The tricks to success are here. Read and do not stop until you are one of very few magicians." Arnold S. Wood, President and Chief Executive Officer, Martingale Asset Management
"I wish this book had been available a decade ago; by understanding behavioral biases, clients and professionals can stay focused and comfortable throughout the markets' bubbles and doldrums. Michael Pompian moves our profession forward by proposing a standardized structure for this approach." Elizabeth K. Miller, CFA, Managing Director, Trevor Stewart Burton & Jacobsen Inc., and former chair, New York Society of Security Analysts' Wealth Management Committee
"Many inefficiencies in the market are the result of how investors let their emotions dictate their investment decisions. Michael Pompian's work provides a framework to understand why these inefficiencies exist, and how they can provide investors with significant profit-making opportunities." Stanley G. Lee, CFA, Principal, David J. Greene & Company, LLC
"Michael Pompian has created a valuable resource for investors and those in the wealth management community by not only explaining a number of important behavioral biases, but also giving them actionable steps to reduce biases and improve investment performance." John M. Longo, PhD, CFA, Senior Vice President, Investment Strategy, The MDE Group, Inc., and Adjunct Professor of Finance, Rutgers University Graduate School of Management