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Behavioral Finance and Wealth Management
Book

Behavioral Finance and Wealth Management

How to Build Optimal Portfolios for Private Clients

Michael Pompian
Wiley, 2006
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Editorial Rating

8

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Recommendation

This excellent, practical guide helps you apply behavioral finance information to your personal wealth management. Though Michael M. Pompian chiefly addresses a readership of professional investment advisers, any investor can benefit from learning more about the irrational factors that affect investment decisions. Readers can choose among many books about behavioral finance, cognitive biases and neuroeconomics. However, very few books can match this one’s hype-free, objective and accessible exposition of this subject. The author provides a brief history of behavioral finance, a thorough catalog of noteworthy investor biases, advice on how to deal with these biases, examples and the likely direction of future research in the field. getAbstract highly recommends his book for its straightforward language, which makes it widely accessible.

Summary

Behavioral Finance Explained

Behavioral finance focuses on the psychology of financial decisions. It takes issue with some fundamental assumptions of conventional finance, especially the notion that markets are efficient and investors are rational. In an efficient market, securities prices supposedly reflect all relevant information so rapidly that no investor can hope to beat the market average over the long term. Prices move as new information emerges and traders quickly take advantage of any mispricing.

This conventional financial thinking leaves no room for irrational market behavior. It assumes that prices reflect everything known or knowable about value. Yet, persistent anomalies show that investors do indeed act somewhat irrationally. For example, investors consistently overprice growth companies and underprice unfashionable companies. In fact, the value style of investing depends on this anomaly. For other investors, timing is everything. For example, they may believe strongly in the January effect, a term that refers to the fact that stock returns in January tend to be high because people sell stock in December to generate tax-deductible losses.

Economists...

About the Author

Michael M. Pompian, CFA, CFP, is the director of the private-wealth practice at investment consulting firm Hammond Associates. He previously was a wealth management adviser with Merrill Lynch and PNC Private Bank.

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