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Investor Behavior: The Psychology of Financial Planning and Investing

Book Description

Investor Behavior provides readers with a comprehensive understanding and the latest research in the area of behavioral finance and investor decision making. Blending contributions from noted academics and experienced practitioners, this 30-chapter book will provide investment professionals with insights on how to understand and manage client behavior; a framework for interpreting financial market activity; and an in-depth understanding of this important new field of investment research. The book should also be of interest to academics, investors, and students.

The book will cover the major principles of investor psychology, including heuristics, bounded rationality, regret theory, mental accounting, framing, prospect theory, and loss aversion. Specific sections of the book will delve into the role of personality traits, financial therapy, retirement planning, financial coaching, and emotions in investment decisions. Other topics covered include risk perception and tolerance, asset allocation decisions under inertia and inattention bias; evidenced based financial planning, motivation and satisfaction, behavioral investment management, and neurofinance. Contributions will delve into the behavioral underpinnings of various trading and investment topics including trader psychology, stock momentum, earnings surprises, and anomalies. The final chapters of the book examine new research on socially responsible investing, mutual funds, and real estate investing from a behavioral perspective. Empirical evidence and current literature about each type of investment issue are featured. Cited research studies are presented in a straightforward manner focusing on the comprehension of study findings, rather than on the details of mathematical frameworks.

Table of Contents

  1. Cover
  2. Series
  3. Title Page
  4. Copyright
  5. Acknowledgments
  6. Part One: Foundations of Investor Behavior
    1. Chapter 1: Investor Behavior: An Overview
      1. INTRODUCTION
      2. ORGANIZATION OF THE BOOK
      3. SUMMARY
      4. REFERENCES
      5. ABOUT THE AUTHORS
    2. Chapter 2: Traditional and Behavioral Finance
      1. INTRODUCTION
      2. TRADITIONAL FINANCE
      3. BEHAVIORAL FINANCE
      4. SUMMARY
      5. DISCUSSION QUESTIONS
      6. REFERENCES
      7. ABOUT THE AUTHOR
    3. Chapter 3: Behavioral Economics, Thinking Processes, Decision Making, and Investment Behavior
      1. INTRODUCTION
      2. BEHAVIORAL ECONOMICS, HEURISTICS, AND DECISION MAKING
      3. INVESTMENT HEURISTICS AND INVESTING IN FINANCIAL ASSETS
      4. THE TRUST HEURISTIC AND DECISION MAKING
      5. OTHER CRITICAL DECISION-MAKING HEURISTICS
      6. RATIONAL INVESTOR DECISION MAKING IN A WORLD OF COMPLEX INFORMATION
      7. SUMMARY
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHOR
  7. Part Two: Personal Finance Issues
    1. Chapter 4: Financial Literacy and Education
      1. INTRODUCTION
      2. EXAMPLES OF FINANCIAL LITERACY MEASURES
      3. FINANCIAL LITERACY AND BEHAVIOR
      4. FINANCIAL LITERACY EDUCATION
      5. SUMMARY
      6. DISCUSSION QUESTIONS
      7. REFERENCES
      8. ABOUT THE AUTHORS
    2. Chapter 5: Household Investment Decisions
      1. INTRODUCTION
      2. FINANCIAL MARKET PARTICIPATION
      3. MARKET FRICTION EFFECTS ON HOUSEHOLD INVESTMENT BEHAVIOR
      4. THE EFFECTS OF BEHAVIORAL BIASES ON HOUSEHOLD INVESTMENT BEHAVIOR
      5. SUMMARY
      6. DISCUSSION QUESTIONS
      7. REFERENCES
      8. ABOUT THE AUTHOR
    3. Chapter 6: Personality Traits
      1. INTRODUCTION
      2. A STRUCTURAL MODEL OF PERSONALITY
      3. RISK-TAKING BEHAVIOR
      4. OVERCONFIDENCE
      5. PERSONALITY AND GENDER
      6. PERSONALITY AS A GUIDE FOR INVESTORS
      7. SUMMARY
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHORS
    4. Chapter 7: Demographic and Socioeconomic Factors of Investors
      1. INTRODUCTION
      2. LITERATURE REVIEW
      3. CASE STUDY: THE FLORIDA DEPARTMENT OF EDUCATION EMPLOYEES
      4. SUMMARY
      5. DISCUSSION QUESTIONS
      6. REFERENCES
      7. ABOUT THE AUTHOR
    5. Chapter 8: The Effect of Religion on Financial and Investing Decisions
      1. INTRODUCTION
      2. RELIGIONS AND ECONOMIC FACTORS: DEPENDENCE OR BIFURCATION?
      3. RELIGION AND INDIVIDUAL INVESTING BEHAVIOR
      4. SUMMARY
      5. DISCUSSION QUESTIONS
      6. REFERENCES
      7. ABOUT THE AUTHORS
    6. Chapter 9: Money and Happiness: Implications for Investor Behavior
      1. INTRODUCTION
      2. CAN MONEY BUY HAPPINESS?
      3. CAN HAPPINESS BUY MONEY?
      4. IMPLICATIONS FOR INVESTOR BEHAVIOR
      5. SUMMARY
      6. DISCUSSION QUESTIONS
      7. REFERENCES
      8. ABOUT THE AUTHOR
    7. Chapter 10: Motivation and Satisfaction
      1. INTRODUCTION
      2. CLASSICAL ECONOMIC MOTIVATION
      3. BEHAVIORAL ECONOMIC MOTIVATION
      4. MASLOW'S HIERARCHY OF NEEDS
      5. CRITICISM OF MASLOW'S HIERARCHY OF NEEDS
      6. HIGHER LEVEL MOTIVATION
      7. HUMANISM
      8. MASLOW AND INVESTMENT MANAGEMENT
      9. PERSONAL FINANCE INTEGRATION
      10. SUMMARY
      11. DISCUSSION QUESTIONS
      12. REFERENCES
      13. ABOUT THE AUTHOR
  8. Part Three: Financial Planning Concepts
    1. Chapter 11: Policy-Based Financial Planning: Decision Rules for a Changing World
      1. INTRODUCTION
      2. MANAGING BEHAVIORAL BIASES IN THE FINANCIAL PLANNING ENGAGEMENT
      3. A PROCESS FOR DEVELOPING FINANCIAL PLANNING POLICIES
      4. APPLICABILITY OF FINANCIAL PLANNING POLICIES
      5. POLICY-BASED FINANCIAL PLANNING: THE STRATEGIC PERSPECTIVE
      6. EXAMPLE OF POLICIES DERIVED THROUGH STOCHASTIC MODELING
      7. SAMPLE CASE APPLICATIONS
      8. SUMMARY
      9. DISCUSSION QUESTIONS
      10. REFERENCES
      11. ABOUT THE AUTHORS
    2. Chapter 12: Financial Counseling and Coaching
      1. INTRODUCTION
      2. FINANCIAL COUNSELING: A HISTORICAL PERSPECTIVE
      3. THEORETICAL APPROACHES: A FINANCIAL COUNSELING PERSPECTIVE
      4. FINANCIAL COUNSELING IN THE TWENTY-FIRST CENTURY
      5. SUMMARY
      6. DISCUSSION QUESTIONS
      7. REFERENCES
      8. ABOUT THE AUTHORS
    3. Chapter 13: Financial Therapy: De-Biasing and Client Behaviors
      1. INTRODUCTION
      2. WHAT IS FINANCIAL THERAPY?
      3. BRIEF HISTORY OF FINANCIAL THERAPY
      4. THEORETICAL FOUNDATIONS FOR FINANCIAL THERAPY
      5. THE PRACTICE OF FINANCIAL THERAPY
      6. FUTURE RESEARCH AND PRACTICE
      7. SUMMARY
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHORS
    4. Chapter 14: Transpersonal Economics
      1. INTRODUCTION
      2. HISTORICAL AND SPIRITUAL OVERVIEW OF MONEY
      3. THE WESTERN ECO/HOUSE
      4. AN ALTERNATIVE PERSPECTIVE
      5. THE OPEN ECO IN FINANCIAL PLANNING
      6. SUMMARY
      7. DISCUSSION QUESTIONS
      8. REFERENCES
      9. ABOUT THE AUTHOR
    5. Chapter 15: Advising the Behavioral Investor: Lessons from the Real World
      1. INTRODUCTION
      2. RISK, RETURN, AND THE INVESTOR: A COMPLEX RELATIONSHIP
      3. INVESTMENTS WITH PEOPLE PROBLEMS
      4. THE IMPACT OF INVESTOR BEHAVIOR ON PORTFOLIOS
      5. HOW ADVISORS CAN HELP THE BEHAVIORAL INVESTOR
      6. TURNING BIAS INTO BENEFIT: HOW TO PROFIT FROM INVESTOR BEHAVIOR
      7. SUMMARY
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. DISCLOSURE
      11. ABOUT THE AUTHOR
    6. Chapter 16: Retirement Planning: Contributions from the Field of Behavioral Finance and Economics
      1. INTRODUCTION
      2. A LIFE CYCLE FINANCIAL PLANNING AND WEALTH MANAGEMENT MODEL
      3. DEMOGRAPHIC AND MACROECONOMIC CONTEXT
      4. BIASES, HEURISTICS, AND FRAMING EFFECTS ON RETIREMENT PLANNING
      5. HYPERBOLIC DISCOUNTING
      6. THE ROLE OF THE BRAIN IN FINANCIAL DECISION-MAKING
      7. FINANCIAL DECISION-MAKING QUALITY AND AGE
      8. THE ROLE OF SELF-AWARENESS AND SELF-CONTROL
      9. TRUST AND RETIREMENT SAVING AND PLANNING: THE BASICS
      10. TRUST AND RETIREMENT SAVING AND PLANNING: THE DECISION
      11. TRUST-BASED IMPLICATIONS FOR RETIREMENT SAVING AND PLANNING
      12. DISCUSSION QUESTIONS
      13. REFERENCES
      14. ABOUT THE AUTHORS
    7. Chapter 17: Knowing Your Numbers: A Scorecard Approach to Improved Medical and Financial Outcomes
      1. INTRODUCTION
      2. THE NEED FOR BETTER CONTROL OF CHRONIC DISEASES
      3. THE SCORECARD APPROACH
      4. TARGET POPULATION AND ADVANTAGES
      5. CONTENT OF THE TAKE CARE SCORECARD
      6. CONSIDERATIONS FOR HEALTH AND FINANCIAL LITERACY SCORECARDS
      7. LIMITATIONS
      8. IMPLICATIONS FOR FINANCIAL LITERACY
      9. SUMMARY
      10. DISCUSSION QUESTIONS
      11. REFERENCES
      12. ABOUT THE AUTHORS
      13. ACKNOWLEDGMENT
  9. Part Four: Investor Psychology
    1. Chapter 18: Risk Perception and Risk Tolerance
      1. INTRODUCTION
      2. RISK PERCEPTION
      3. THE RELATIONSHIP BETWEEN RISK PERCEPTION AND RISK TOLERANCE
      4. AN OVERVIEW OF RISK TOLERANCE
      5. MEASUREMENT OF RISK TOLERANCE
      6. THE ROLE OF EMOTION IN RISK PERCEPTION AND RISK TOLERANCE
      7. RISK-TAKING BEHAVIOR: THE INFLUENCE OF MARKET MOODS, BUSINESS CYCLES, AND ECONOMIC SHOCKS
      8. UNRESOLVED ISSUES IN THE RISK DOMAIN
      9. SUMMARY
      10. DISCUSSION QUESTIONS
      11. REFERENCES
      12. ABOUT THE AUTHORS
    2. Chapter 19: Emotions in the Financial Markets
      1. INTRODUCTION
      2. BEHAVIORAL FINANCE AND PROSPECT THEORY
      3. EMOTIONS
      4. EMOTIONS IN THE FINANCIAL MARKETS
      5. EMOTIONAL FINANCE AND UNCONSCIOUS EMOTIONS
      6. EMOTIONAL CORPORATE FINANCE—A FORMAL MODEL
      7. SUMMARY
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHOR
    3. Chapter 20: Human Psychology and Market Seasonality
      1. INTRODUCTION
      2. MOODS, EMOTIONS, AND SENTIMENT
      3. WEATHER, MOOD, AND MARKETS
      4. DAYLIGHT, MOOD, AND MARKETS
      5. DAYLIGHT SAVING TIME CHANGES, MOOD, AND MARKETS
      6. ELATION, DEFLATION, AND MARKETS
      7. SUMMARY
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHOR
    4. Chapter 21: Neurofinance
      1. INTRODUCTION
      2. NEUROSCIENCE PRIMER
      3. RESEARCH METHODS
      4. THE NEUROSCIENCE OF FINANCIAL DECISION-MAKING
      5. THE IMPLICATIONS OF NEUROFINANCE RESEARCH FOR PRACTITIONERS
      6. SUMMARY
      7. DISCUSSION QUESTIONS
      8. REFERENCES
      9. ABOUT THE AUTHOR
    5. Chapter 22: Diversification and Asset Allocation Puzzles
      1. INTRODUCTION
      2. HOUSEHOLD STOCK MARKET PARTICIPATION
      3. CHANGES IN HOUSEHOLD PORTFOLIOS ACROSS TIME
      4. DIFFERENCES IN HOUSEHOLD PORTFOLIOS ACROSS COUNTRIES
      5. PORTFOLIO DIVERSIFICATION
      6. HOUSEHOLD STOCK TRADING BEHAVIOR
      7. SUMMARY
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHOR
    6. Chapter 23: Behavioral Portfolio Theory and Investment Management
      1. INTRODUCTION
      2. PROSPECT THEORY AND EXPECTED UTILITY THEORY
      3. SAFETY-FIRST PORTFOLIO THEORY
      4. SP/A THEORY
      5. BEHAVIORAL PORTFOLIO THEORY
      6. BEHAVIORAL ASSET PRICING MODEL
      7. THE BAPM, CAPM, AND THREE-FACTOR MODEL
      8. SUMMARY
      9. DISCUSSION QUESTIONS
      10. REFERENCES
      11. ABOUT THE AUTHORS
    7. Chapter 24: Post-Crisis Investor Behavior: Experience Matters
      1. INTRODUCTION
      2. BEHAVIORAL FINANCE FRAMEWORK
      3. HISTORY DEPENDENT RISK TOLERANCE: THE COLLECTIVE MEMORY HYPOTHESIS
      4. SUMMARY
      5. DISCUSSION QUESTIONS
      6. REFERENCES
      7. ABOUT THE AUTHOR
  10. Part Five: Trading and Investing Psychology and Strategies
    1. Chapter 25: The Psychology of Trading and Investing
      1. INTRODUCTION
      2. PERSONALITY VARIABLES
      3. AFFECT AND COGNITION
      4. NEWS, RUMORS, AND MARKET MOOD
      5. SUMMARY
      6. DISCUSSION QUESTIONS
      7. REFERENCES
      8. ABOUT THE AUTHORS
    2. Chapter 26: The Surprising Real World of Traders' Psychology
      1. INTRODUCTION
      2. WHAT SCIENCE REVEALS ABOUT HOW PEOPLE THINK
      3. I NEED TO BE A HERO AGAIN
      4. THE HEART OF A QUANT
      5. SUMMARY
      6. DISCUSSION QUESTIONS
      7. REFERENCES
      8. ABOUT THE AUTHORS
    3. Chapter 27: Trading and Investment Strategies in Behavioral Finance
      1. INTRODUCTION
      2. DISTINCTION BETWEEN TRADING AND INVESTMENT STRATEGIES
      3. ACTIVE VERSUS PASSIVE INVESTMENT STRATEGIES AND BEHAVIORAL FINANCE
      4. AVERAGE INVESTORS SUFFER FROM BEHAVIORAL BIASES
      5. PROBLEMS WITH TRADITIONAL INVESTMENT STRATEGIES
      6. SHORT-TERM BEHAVIORALLY BASED TRADING STRATEGIES
      7. LONG-TERM BEHAVIORALLY BASED INVESTMENT STRATEGIES
      8. CURRENT AND FUTURE TRENDS IN BEHAVIORAL FINANCE STRATEGIES
      9. SUMMARY
      10. DISCUSSION QUESTIONS
      11. REFERENCES
      12. ABOUT THE AUTHOR
  11. Part Six: Special Investment Topics
    1. Chapter 28: Ethical and Socially Responsible Investing
      1. INTRODUCTION
      2. SOCIALLY RESPONSIBLE INVESTMENT
      3. HISTORICAL EMERGENCE
      4. INTERNATIONAL DIFFERENCES
      5. INSTITUTIONAL HARMONIZATION OF FSR
      6. SRI IN THE POST 2008−2009 WORLD FINANCIAL CRISIS ERA OF GLOBALIZATION
      7. SUMMARY
      8. DISCUSSION QUESTIONS
      9. REFERENCES
      10. ABOUT THE AUTHOR
    2. Chapter 29: Mutual Funds and Individual Investors: Advertising and Behavioral Issues
      1. INTRODUCTION
      2. ADVERTISING AND PERFORMANCE
      3. ADVERTISING, EXPENSES, AND FLOWS
      4. ADVERTISING, EMOTIONS, AND CHOICE
      5. BEHAVIORAL PERSUASION IN ADVERTISING AND CHOICE
      6. EDUCATION, FINANCIAL KNOWLEDGE, AND CHOICE
      7. EMOTIONS, BEHAVIOR, AND CHOICE
      8. EMOTIONS, BEHAVIORAL FINANCE, AND CHOICE
      9. FINANCIAL LITERACY AND ACTIVE MANAGEMENT
      10. PRICE AND PERFORMANCE SENSITIVITY AND REPRICING
      11. SENTIMENT CONTRARIAN BEHAVIOR AND ACTUAL PERFORMANCE
      12. SUMMARY
      13. DISCUSSION QUESTIONS
      14. REFERENCES
      15. ABOUT THE AUTHOR
    3. Chapter 30: Real Estate Investment Decision-Making in Behavioral Finance
      1. INTRODUCTION
      2. THE REAL ESTATE MARKET AND THE GENERAL ECONOMY
      3. REAL ESTATE MARKET AND FINANCIAL MARKET
      4. INEFFICIENCIES AND THE REAL ESTATE MARKETS
      5. OBSERVED INEFFICIENCIES IN REAL ESTATE MARKETS
      6. SUMMARY
      7. DISCUSSION QUESTIONS
      8. REFERENCES
      9. ABOUT THE AUTHORS
  12. Answers to Discussion Questions
  13. Index