Behavioral Finance and Investor Types: Managing Behavior to Make Better Investment Decisions

Foreword

Fishermen often use the expression “to set the hook” and that is what I hope to do for Behavioral Finance and Investor Types. Michael Pompian graciously asked me if I would write this Foreword and, in a blink, I agreed. Why? Because the investing pond is full of investors who need to take the hook Michael is presenting here.

You are about to read and solve a mystery of sorts. It lifts the curtain on what lurks behind investment choices—improperly formulated choices that so often derail expectations. This book takes the often tedious and proverbial “scraping and sanding before painting” and makes it the intriguing cornerstone of investing. Ben Franklin, always insightful about visionaries, wrote in the 1769 Farmers' Almanac, “There are three things extremely hard: steel, a diamond, and to know one's self.” To make sound choices, you must know yourself in order to know what decisions your personality can withstand when building and implementing an investment policy and process. You must know yourself, or the organization for which you serve, well enough to convey the beliefs, preferences, and biases about those whom you have chosen to advise you on investment decisions. This includes brokers, consultants, investment advisors, and so on. To be unable to do so is a prescription for inappropriate asset selection and portfolio composition—a far too common outcome. This is true from both an expected return and an expected risk perspective.

It is hard to imagine how much effort ...