Customer Reviews

Behavioral Finance and Wealth Management: How to Build Optimal Portfolios That Account for Investor Biases (Wiley Finance)

5 star:		(11)
4 star:		(4)
3 star:		(1)
2 star:		(0)
1 star:		(0)

 

 

Sorry to be the dissenting opinion, but someone has to say the emperor has no clothes. Being a money manager for individuals, I -like many others- are scrambling for the "new-new" thing in portfolio development. I picked up this book because I've been trying to tie in clients' behaviors with Modern Portfolio Theory and take it to the next step of creating investment portfolio allocations given set(s) of behavior and biases. The book is aptly titled, "Behavioral Finance...."- but shouldn't have "....Wealth Management" in the title, nor should it have the subtitle- "How to build optimal portfolios that account for investor biases". (I'm contacting the publisher about that one.) Michael Pompian does a fantastic job of telling us why people do the things they do and why they act the way they do with their investments, but no where- repeat- no where, does it talk about building portfolios that account for those behaviors. That's really up to the advisor. I really soaked up the behavioral characterizations and it really enlightened me to specific clients I have, but again- don't think that the (sub)title means anything- it doesn't. This should be required reading for all those in the field, but look elsewhere if you're trying to create/manage portfolios. Each chapter ends with "Practical Application"s, but they're not worth the paper it's printed on- they're just a regurgitation of A.) the chapter itself and B.) conventional wisdom in the form of- you're the advisor- go figure it out yourself by reading more studies (lots of other studies sited in the book!). I'm giving the book three stars because it does provide behavioral analysis- the other two stars would be if Michael delivered on the title "How to build optimal portfolios..."....he doesn't. (maybe Amazon forgot to send me the accompanying workbook?!?)

In a remarkably lucid book, Pompian provides an excellent overview of different cognitive and emotional biases that affect investor behavior other researchers have shown to exist or have characterized well. In this book, each of the biases (over 20 of them) are succinctly defined. Then, the author presents the ramifications of that bias with respect to investor behavior and how it can manifest itself. Further, he provides a brief discussion on how the effect of that bias can be addressed (in this section, he writes as if he is talking only to financial advisers, though the discussion is apt for any investor). In addition, each chapter contains some self-tests that can indicate whether that bias exists or not. Overall, an excellent book for a serious investor and any novice researcher in this field. A must-have. In addition to these books, the reader may be interested in the two books written by Brett N. Steenbarger.

I first read this book, and then a few weeks later read Jason Zweig's Your Money and Your Brain.

Pompian's book wins hands down from a practical viewpoint......how you can use behavioral finance findings as an investor or investment advisor. Pompian lists all 20 common biases, and then gives examples of how to deal with them. I also enjoyed his section on using Briggs Myers test results coupled with behavioral finance principles.....to develop better financial plans which fit people better.

Zweig's book is a fascinating read.......but when I got done......my question was.....How to I apply these behavioral finance findings to my investments or my client's financial plans? I would have to re-read Zweig's book......and develop the practical uses myself from his book.

It is interesting that Zweig's book at $17 has an Amazon sales rank of 2,075......and Pompian's book at $38 is only ranked 38,940. I have always enjoyed reading Zweig's columns in Money magazine. It is interesting to see where future research is headed in Zweig's book.......but in my opinion; you get more practical advice (or value) for the dollar from Pompian's book than Zweig's book.

To compliment this book.....I would suggest a couple good books on index fund investing and asset allocation.


The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing

Michael Pompian has written a book that will prove invaluable to wealth advisors serious about "getting it right" for their clients.

The hardest task a wealth advisor faces is determining the "real" risk tolerance of his or her client. Behavioral finance, when it began to be discussed in the journals, promised the wealth advisor great help in this regard. However, applying its academic principles to real-world situations was challenging for the practicing wealth advisor. Mr. Pompian's book gives real help in meeting this challenge.

Mr. Pompian describes the various biases investors possess and how they affect investment choices and the investor's reaction to the various consequences that flow from those choices. Of greatest value, in my opinion, are the practical assessment tools Mr. Pompian provides.

It took some time for Modern Portfolio Theory to have an impact on real portfolios. Important, practical books along the way helped. The same can be said of Behavioral Finance; Mr. Pompian's book is the first of what we practioners hope is a long list of practical books that will allow Behavioral Finance to have the great impact it surely will.

This book is a "must-read" for the conscientious wealth advisor. I hope that a second edition provides either an interactive website access or a CD with an assessment instrument.

This book has some good practical advice. Much of it was not very useful to me, either because (a) it was already obvious to me, or (b) it was directed at financial advisers, and I am an individual investor, not an adviser. However, I'm sure that there are many people for whom almost all the advice would be useful and needed.

The book contains minor mistakes here and there (mostly copyediting), and one major mistake: The author thinks that risk aversion is a fallacy or some form of irrationality. (This is clear in his remarks on pp. 214, 252.) In this, Pompian is implicitly rejecting a universally accepted principle of economics: the Law of Diminishing Marginal Utility (roughly, that the value of an additional dollar diminishes as your total wealth increases).

This is important, because this Law is the central reason, e.g., why it often makes sense to purchase insurance, why it makes sense to hedge bets, and why investors need to balance risk against potential reward. Failure to understand this could be a pretty serious problem for an investment adviser.

I'm hard to please. So when I say this book is superb, that's really saying something. It is a well organized reference of twenty cognitive and emotional biases, and I refer to it frequently. Yet it's engaging enough to read cover to cover. You will probably recognize yourself being described a bit more often than you might expect. But with an open mind you will learn how to mitigate the tempting errors of thought that have in the past steered you wrong. And most fun of all, you can use your new knowledge of these biases to take advantage in the marketplace, and all the way to the bank. Game on.

As an investment consultant working with high net worth private wealth clients I have found Mr. Pompian's book invaluable. Understanding clients' views and the bias they bring to the table is crucial to helping them overcome their emotions in order to create a sound and diversified institutional quality portfolio. The best finance book I have read since Benjamin Graham's classic, The Intelligent Investor.

Mr. Pompian has written a valuable introduction to the field of applied behavioral finance. He structures the book such that different behavioral biases are presented in short, technical, and applied discussions. This layout is helpful if the reader is looking for a modular reference book (or learns well within that pattern), but it makes the book difficult for those who desire a greater narrative flow. The ideal reader for this book is well defined: the practicing wealth manager who seeks to better adapt his or her practice to clients (or, if necessary, vice versa) without sacrificing the integrity of rational investment strategy.

It is important to note that Mr. Pompian's names, descriptions, and classifications of behavioral biases are not complete and established truth; other authors present different takes on various biases. Mr. Pompian here wins plaudits for being more thorough than most in the number of biases covered, though I found a few of his characterizations somewhat overlapping one another due to the sheer number of biases presented. He is also quite good at citing references and further reading: this book is quite well placed in the technicality spectrum as written for the practitioner -- neither simple enough for the layperson, nor sufficiently rigorous for the academic. Other texts work better for those who require more or less of a technical presentation.

To sum: this book is one of several potential good introductory texts to behavioral finance, but non-practitioners will likely find it lacking.

I am a graduate student of finance and I am now writing my degree thesis about implications of behavioral finance for individual investors. Pompian's book is a great inspiration for me. It is just a guide how to use results of behavioral finance research to be a better investor.

What I mostly appreciate is a very deep description of 20 behavioral biases. Each of these chapter starts with General Description of the bias, Technical Description. Then there is a Practical Application, Implications for Investors, Research Review, Diagnostic Testing and a Final Advice. I have alredy read Shefrin's Beyon Greed and Fear and I must say that this book was kind of research review and survey. Pompian's book is very practical. Novice investors and also professional traders and portfolio managers will greatly appreciate this book.

There are really a great bunch of practical advice. Pompian is just a great teacher. Every serious student of finance and every investor must read this book!!!

This book covers most of the important cognitive biases that affect investment decision. It makes a great read. The only thing that can be improved is on the aspect of "objective truth". When talking about bias, the author has to assume there is an objective truth out there that is ex ante and easily oberservable to everyone. While this may make it handy for his discussion, it could be misleading if one digs deeper into the market nature of uncertainty.