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Praise for Behavioral Finance and Investor Types
"Michael has done yeoman′s service in taking years of academic research and his own practitioner insights to illuminate the mandatory need to understand the virtues of the physiological implications of choice. He is bringing these essential findings to the forefront of untangling everyday investment thinking with the clear mandate of implementing sound investment decisions. His combined knowledge of the inherent drivers of investor behavior, and years of careful observation, clearly illuminates that shoe sizes, so to speak, vary a great deal."
Arnie Wood, CEO, Martingale Asset Management
"Pompian brings something new to the field of behavioral finance books. By combining insights into our fundamental cognitive and emotional biases with insights into fundamental personality types, he provides concrete, practical action steps to avoid making big mistakes. In classic Pompian style, he does it with efficient, easy–to–read prose. You do not want to make important financial decisions without reading this book."
Stephen Horan, Head, University Relations and Private Wealth, CFA Institute
"For centuries, great thinkers like Hippocrates and Plato have sought to explain the distinct personality types that drove human behavior. Behavioral Finance and Investor Types extends their constructs and identifies unique Behavioral Investment Types that help explain why investors have such difficulty in achieving their long–term goals. This book provides an outstanding road map for understanding our individual behavioral biases, embracing our unique investor personality, and allocating our portfolios to capitalize on our individual strengths. Behavioral Finance and Investor Types is required reading for any investor who wants to enhance the probability of achieving long–term investment success."
Mark Yusko, CEO and CIO, Morgan Creek Capital Management
"Personality is linked to investors′ cognitive errors, including overconfidence, and emotions, including regret. Michael Pompian contributes greatly to our understanding of investors′ behavior as he exposes these important links."
Meir Statman, Glenn Klimek Professor of Finance, Santa Clara University
"Michael Pompian takes investors on a fascinating tour from behavioral finance through personality theory to what he calls Behavioral Investor Types. He manages to simplify the complex world of behavioral investing so that investors and their advisors can get their arms around this large subject. Best of all, Pompian provides clear guidance for how to avoid the behavioral traps that stand between investors and their financial goals."
Gregory Curtis, Chairman, Greycourt & Co., Inc.
"Chock–full of practical applications, this book is an invaluable introduction to behavioral finance, a field of study that will make you a much better investor and advisor. It will certainly be required reading in our practice."
Harold Evensky, President, Evensky & Katz
Foreword xi
Preface xiii
Acknowledgments xxi
PART ONE Introduction to Behavioral Finance 1
CHAPTER 1 Why Reaching Financial Goals Is Difficult 3
Nonfinancial Examples of Self–Defeating Behavior 4
Financial Examples of Self–Defeating Behavior 8
Summary 11
Notes 12
CHAPTER 2 Overview of Behavioral Finance 13
Behavioral Finance: Micro versus Macro 14
Standard Finance versus Behavioral Finance 15
The Role of Behavioral Finance with Private Clients 22
Practical Applications 22
Notes 24
CHAPTER 3 The Building Blocks: Behavioral Biases 25
Cognitive Biases 27
Emotional Biases 38
Summary 43
Notes 44
PART TWO Personality Theory 45
CHAPTER 4 Introduction to Personality Theory 47
History of Personality Theory 48
Four Main Personality Theories 50
Notes 65
CHAPTER 5 The History of Personality Testing 67
Types of Personality Tests 67
Summary 77
Notes 77
CHAPTER 6 The Behavioral Investor Type Framework 79
Reviewing the Original Process 81
The Behavioral Alpha Process: A Top–Down Approach 81
Updates to the Previous Model 85
Updated BIT Theory and Application 87
Summary 89
CHAPTER 7 Behavioral Investor Type Diagnostic Testing 91
Step 1: BIT Orientation Quiz 92
Step 2: Bias Identification Quiz 94
Summary 100
PART THREE Explanation of the Behavioral Investor Types 101
CHAPTER 8 The Preserver 103
Upside/Downside Analysis 104
Bias Analysis 105
Other Biases 107
Advice for Preservers 109
CHAPTER 9 The Follower 111
Upside/Downside Analysis 112
Bias Analysis 113
Other Biases 117
Advice for Followers 119
CHAPTER 10 The Independent 121
Upside/Downside Analysis 122
Bias Analysis 123
Advice for Independents 133
CHAPTER 11 The Accumulator 135
Upside/Downside Analysis 136
Bias Analysis 137
Other Biases 141
Advice for Accumulators 144
PART FOUR Plan and Act 147
CHAPTER 12 Capital Markets and Asset Classes 149
Overview of Asset Classes 150
Publicly Traded Equity Investments (Stocks) 154
Fixed Income Investments (Bonds) 163
Hedge Funds 172
Real Assets 176
Simple Portfolio Construction 180
Summary 182
Notes 182
CHAPTER 13 What Is Asset Allocation? 183
The Importance of Assumptions 185
The Importance of Strategic Asset Allocation 186
Considerations for Individual Investors 188
Why Asset Allocation Is So Important 197
Summary 200
Notes 200
CHAPTER 14 Financial Planning: A Crucial Step 201
What Is Financial Planning? 202
Working with a Financial Planner 203
What Is a Certified Financial Planner? 205
Who Can Provide Financial Planning Services? 209
Summary 212
Notes 213
CHAPTER 15 Investment Advice for Each Behavioral Investor Type 215
Foundations of Best Practical Allocation 216
Guidelines for Determining When to Moderate and When to Adapt 217
Best Practical Allocation for Preservers 219
Best Practical Allocation for Followers 222
Best Practical Allocation for Independents 224
Best Practical Allocation for Accumulators 227
Summary 229
Note 230
Index 231
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MICHAEL M. POMPIAN, CFA, CAIA, CFP, is a partner at Mercer Investment Consulting (formerly Hammond Associates) serving institutional and private wealth clients. Prior to joining Mercer, he worked at Merrill Lynch and PNC Private Bank, as well as the investment staff of a family office. Pompian holds the Chartered Financial Analyst (CFA) designation, is a Chartered Alternative Investment Analyst (CAIA) and a Certified Financial Planner (CFP). He is also a member of the CFA Institute (formerly AIMR) and the New York Society of Security Analysts (NYSSA). He holds a BS in management from the University of New Hampshire and an MBA from Tulane University. He is a regular speaker on the subject of behavioral finance and has published numerous articles on the subject. He is married with three sons and can be reached at mpompian@hotmail.com.
