Behavioral Finance and Your Portfolio

MICHAEL M. POMPIAN is Founder and Chief Investment Officer of Sunpointe Investments, an investment advisory and wealth management firm based in St. Louis, Missouri. He is the author of five books on finance, including Advising Ultra-Affluent Clients and Family Offices, Behavioral Finance and Wealth Management, and Behavioral Finance and Investor Types.

• Preface xvAcknowledgments xxiAbout the Author xxiiiPart I Introduction To Behavioral Finance 1Chapter 1: What is Behavioral Finance and Why Does It Matter? 3Why Behavioral Finance Matters 5Behavioral Finance: The Big Picture 6Standard Finance versus Behavioral Finance 15Chapter 2: Introduction to Behavioral Biases 23Introduction 23Behavioral Biases Defined 24Why Understanding and Identifying Behavioral Biases is Crucial 25Categorization of Behavioral Biases 27Differences between Cognitive and Emotional Biases 27Difference among Cognitive Biases 28Emotional Biases 29A Final Word on Biases 31Part II Belief Perseverance Biases Defined and Illustrated 33Chapter 3: Belief Perseverance Bias #1: Cognitive Dissonance Bias 35Bias Description 35Am I Subject to Cognitive Dissonance Bias? 38Investment Advice 39Chapter 4: Belief Perseverance Bias #2: Conservatism Bias 41Bias Description 41Am I Subject to Conservatism Bias? 44Investment Advice 45Chapter 5: Belief Perseverance Bias #3: Confirmation Bias 47Bias Description 47Am I Subject to Confirmation Bias? 51Investment Advice 52Chapter 6: Belief Perseverance Bias #4: Representativeness Bias 55Bias Description 55Examples of Representativeness Bias 56Am I Subject to Representativeness Bias? 60Investment Advice 62Chapter 7: Belief Perseverance Bias #5: Illusion-of-Control Bias 65Bias Description 65Example of Illusion of Control Bias 66Am I Subject to Illusion of Control Bias? 69Investment Advice 70Chapter 8: Belief Perseverance Bias #6: Hindsight Bias 73Bias Description 73Example of Hindsight Bias 74Am I Subject to Hindsight Bias? 76Investment Advice 77Part III: Information Processing Biases Defined and Illustrated 79Chapter 9: Information Processing Bias #1: Mental Accounting Bias 81Bias Description 81Practical Application 83Am I Subject to Mental Accounting Bias? 85Investment Advice 88Chapter 10: Information Processing Bias #2: Anchoring Bias 91Bias Description 91Example of Anchoring and Bias 92Am I Subject to Anchoring Bias? 94Investment Advice 95Bonus Discussion: Investment Strategies That Leverage Anchoring Bias 96Chapter 11: Information Processing Bias #3: Framing Bias 99Bias Description 99Example of Framing Bias 101Am I Subject to Framing Bias? 105Investment Advice 107Chapter 12: Information Processing Bias #4: Availability Bias 109Bias Description 109Example of Availability Bias 110Am I Subject to Availability Bias? 113Investment Advice 114Chapter 13: Information Processing Bias #5: Self-Attribution Bias 117Bias Description 117Example of Self-Attribution Bias 118Am I Subject to Self-Attribution Bias? 119Investment Advice 121Chapter 14: Information Processing Bias #6: Outcome Bias 123Bias Description 123Am I Subject to Recency Bias? 125Chapter 15: Information Processing Bias #7: Recency Bias 129Bias Description 129Example of Recency Bias 130Am I Subject to Recency Bias? 134Investment Advice 135Part IV: Emotional Biases Defined and Illustrated 137Chapter 16: Emotional Bias #1: Loss Aversion Bias 139Bias Description 139Example of Loss Aversion Bias 140Am I Subject to Loss Aversion Bias? 142Investment Advice 144Chapter 17: Emotional Bias #2: Overconfidence Bias 145Bias Description 145Examples of Overconfidence Bias 146Am I Subject to Overconfidence Bias? 148Investment Advice 151A Final Word on Overconfidence 153Chapter 18: Emotional Bias #3: Self-Control Bias 155Bias Description 155Example of Self-Control Bias 156Am I Subject to Self-Control Bias? 159Investment Advice 160Chapter 19: Emotional Bias #4: Status Quo Bias 163Bias Description 163Example of Status Quo Bias 164Am I Subject to Status Quo Bias? 165Investment Advice 167Chapter 20: Emotional Bias #5: Endowment Bias 169Bias Description 169Example of Endowment Bias 170Am I Subject to Endowment Bias? 172Investment Advice 173Chapter 21: Emotional Bias #6: Regret Aversion Bias 175Bias Description 175Example of Regret Bias 176Am I Subject to Regret Bias? 179Advice 180Chapter 22: Emotional Bias #7: Affinity Bias 183Bias Description 183Example of Affinity Bias 184Am I Subject to Affinity Bias? 186Investment Advice 188Part V: Behavioral Investor Types 189Chapter 23: Staying on Target to Reach Financial Goals is Hard 191Non-Financial Examples ofSelf-Defeating Behavior 192Financial Examples of Self-Defeating Behavior 196Chapter 24: Introduction to Behavioral Investor Types 201Introduction 201What is My Behavioral Investor Type? 204Step 1: BIT Orientation Quiz 205Step 2: Bias Identification Quiz 210Step 3: Advice for Each BIT 216Summary 216Chapter 25: Preserver Behavioral Investor Type 217Upside/Downside Analysis 219Bias Analysis of Preservers 220Advice for Preservers 224Chapter 26: Follower Behavioral Investor Type 225Upside/Downside Analysis 227Bias Analysis of Followers 228Other Important Follower Biases: Hindsight, Cognitive Dissonance and Regret 232Advice for Followers 233Chapter 27: Independent Behavioral Investor Type 235Upside/Downside Analysis 237Bias Analysis of Independents 238Self-Attribution 240Conservatism Bias 241Representative Bias 242Advice for Independents 242Chapter 28: Accumulator Behavioral Investor Type 243Upside/Downside Analysis 245Accumulator Bias Analysis 246Advice for Accumulators 251Chapter 29: Asset Allocation Case Studies for Each Behavioral Investor Type 253Part VI: Behavioral Aspects of Portfolio Implementation 271Chapter 30: Behavioral Finance Aspects of the Active versus Passive Debate 273The Logic of Passive Management 274The Potential Benefits of Active Management 274Advice: Use the Best Practical Allocation for Your Portfolio 277Chapter 31: Behaviorally Aware Portfolio Construction 279Introduction 279Goals-based Investing 280Consolidating Accounts into a Portfolio View 281Portfolio Approach 282Chapter 32: Behavioral Finance and Market Corrections 285The Most Recent Panic 286Index 291