The purpose of this seminar is to give you a good understanding of the psychological factors that affect investment decision making of investors and to discuss how these factors affect financial markets and how they can be integrated into the investment planning process.
We start with an overall introduction to behavioral finance and its applications. We explain what behavioral finance is and, using examples from financial crises, we discuss how investor psychology may lead to a “herd” behavior that exacerbates swings, bubbles and crashes in financial markets. We also discuss how behavioral finance can help the investment advisor in creating a successful advisory relationship.
We then explore in-depth the various themes of behavioral finance. The first theme is heuristic-driven biases. We explain how biases such as “representativeness”, “overconfidence”, “anchoring-and-adjustment”, “availability bias” and “aversion to ambiguity” can impact long-term and short term forecasts.
The second theme is frame dependence. We here explain how loss aversion can result in investors’ willingness to hold on to deteriorating investment positions and we evaluate the impacts that the emotional frames of “self-control”, “regret minimization”, and “money illusion” have on investor behavior.
Further, we evaluate the impact that representativeness, conservatism, frame dependence, and overconfidence may have on security pricing and discuss the implications for market efficiency.
Finally, we discuss how behavioral finance can be used in the investment management process. We introduce the concept of “goals-based investing” and explain how portfolios can be structured as layered pyramids and how such structures address needs associated with security, potential, and aspiration. We evaluate the effects of regret and self-attribution bias on the relationship that investors form with their financial advisers, and we evaluate the impact of excessive optimism and overconfidence on investors’ decisions regarding portfolio construction. We also explain and demonstrate how a client’s “lifestyle objectives” can be translated into a quantitative risk budget and how an optimal portfolio can be constructed under this constraint.