Contents
Cover
Series
Title Page
Copyright
Acknowledgments
Part One: Foundations of Investor Behavior
Chapter 1: Investor Behavior: An Overview
INTRODUCTION
ORGANIZATION OF THE BOOK
SUMMARY
REFERENCES
ABOUT THE AUTHORS
Chapter 2: Traditional and Behavioral Finance
INTRODUCTION
TRADITIONAL FINANCE
BEHAVIORAL FINANCE
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Chapter 3: Behavioral Economics, Thinking Processes, Decision Making, and Investment Behavior
INTRODUCTION
BEHAVIORAL ECONOMICS, HEURISTICS, AND DECISION MAKING
INVESTMENT HEURISTICS AND INVESTING IN FINANCIAL ASSETS
THE TRUST HEURISTIC AND DECISION MAKING
OTHER CRITICAL DECISION-MAKING HEURISTICS
RATIONAL INVESTOR DECISION MAKING IN A WORLD OF COMPLEX INFORMATION
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Part Two: Personal Finance Issues
Chapter 4: Financial Literacy and Education
INTRODUCTION
EXAMPLES OF FINANCIAL LITERACY MEASURES
FINANCIAL LITERACY AND BEHAVIOR
FINANCIAL LITERACY EDUCATION
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Chapter 5: Household Investment Decisions
INTRODUCTION
FINANCIAL MARKET PARTICIPATION
MARKET FRICTION EFFECTS ON HOUSEHOLD INVESTMENT BEHAVIOR
THE EFFECTS OF BEHAVIORAL BIASES ON HOUSEHOLD INVESTMENT BEHAVIOR
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Chapter 6: Personality Traits
INTRODUCTION
A STRUCTURAL MODEL OF PERSONALITY
RISK-TAKING BEHAVIOR
OVERCONFIDENCE
PERSONALITY AND GENDER
PERSONALITY AS A GUIDE FOR INVESTORS
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Chapter 7: Demographic and Socioeconomic Factors of Investors
INTRODUCTION
LITERATURE REVIEW
CASE STUDY: THE FLORIDA DEPARTMENT OF EDUCATION EMPLOYEES
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Chapter 8: The Effect of Religion on Financial and Investing Decisions
INTRODUCTION
RELIGIONS AND ECONOMIC FACTORS: DEPENDENCE OR BIFURCATION?
RELIGION AND INDIVIDUAL INVESTING BEHAVIOR
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Chapter 9: Money and Happiness: Implications for Investor Behavior
INTRODUCTION
CAN MONEY BUY HAPPINESS?
CAN HAPPINESS BUY MONEY?
IMPLICATIONS FOR INVESTOR BEHAVIOR
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Chapter 10: Motivation and Satisfaction
INTRODUCTION
CLASSICAL ECONOMIC MOTIVATION
BEHAVIORAL ECONOMIC MOTIVATION
MASLOW'S HIERARCHY OF NEEDS
CRITICISM OF MASLOW'S HIERARCHY OF NEEDS
HIGHER LEVEL MOTIVATION
HUMANISM
MASLOW AND INVESTMENT MANAGEMENT
PERSONAL FINANCE INTEGRATION
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Part Three: Financial Planning Concepts
Chapter 11: Policy-Based Financial Planning: Decision Rules for a Changing World
INTRODUCTION
MANAGING BEHAVIORAL BIASES IN THE FINANCIAL PLANNING ENGAGEMENT
A PROCESS FOR DEVELOPING FINANCIAL PLANNING POLICIES
APPLICABILITY OF FINANCIAL PLANNING POLICIES
POLICY-BASED FINANCIAL PLANNING: THE STRATEGIC PERSPECTIVE
EXAMPLE OF POLICIES DERIVED THROUGH STOCHASTIC MODELING
SAMPLE CASE APPLICATIONS
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Chapter 12: Financial Counseling and Coaching
INTRODUCTION
FINANCIAL COUNSELING: A HISTORICAL PERSPECTIVE
THEORETICAL APPROACHES: A FINANCIAL COUNSELING PERSPECTIVE
FINANCIAL COUNSELING IN THE TWENTY-FIRST CENTURY
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Chapter 13: Financial Therapy: De-Biasing and Client Behaviors
INTRODUCTION
WHAT IS FINANCIAL THERAPY?
BRIEF HISTORY OF FINANCIAL THERAPY
THEORETICAL FOUNDATIONS FOR FINANCIAL THERAPY
THE PRACTICE OF FINANCIAL THERAPY
FUTURE RESEARCH AND PRACTICE
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Chapter 14: Transpersonal Economics
INTRODUCTION
HISTORICAL AND SPIRITUAL OVERVIEW OF MONEY
THE WESTERN ECO/HOUSE
AN ALTERNATIVE PERSPECTIVE
THE OPEN ECO IN FINANCIAL PLANNING
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Chapter 15: Advising the Behavioral Investor: Lessons from the Real World
INTRODUCTION
RISK, RETURN, AND THE INVESTOR: A COMPLEX RELATIONSHIP
INVESTMENTS WITH PEOPLE PROBLEMS
THE IMPACT OF INVESTOR BEHAVIOR ON PORTFOLIOS
HOW ADVISORS CAN HELP THE BEHAVIORAL INVESTOR
TURNING BIAS INTO BENEFIT: HOW TO PROFIT FROM INVESTOR BEHAVIOR
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
DISCLOSURE
ABOUT THE AUTHOR
Chapter 16: Retirement Planning: Contributions from the Field of Behavioral Finance and Economics
INTRODUCTION
A LIFE CYCLE FINANCIAL PLANNING AND WEALTH MANAGEMENT MODEL
DEMOGRAPHIC AND MACROECONOMIC CONTEXT
BIASES, HEURISTICS, AND FRAMING EFFECTS ON RETIREMENT PLANNING
HYPERBOLIC DISCOUNTING
THE ROLE OF THE BRAIN IN FINANCIAL DECISION-MAKING
FINANCIAL DECISION-MAKING QUALITY AND AGE
THE ROLE OF SELF-AWARENESS AND SELF-CONTROL
TRUST AND RETIREMENT SAVING AND PLANNING: THE BASICS
TRUST AND RETIREMENT SAVING AND PLANNING: THE DECISION
TRUST-BASED IMPLICATIONS FOR RETIREMENT SAVING AND PLANNING
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Chapter 17: Knowing Your Numbers: A Scorecard Approach to Improved Medical and Financial Outcomes
INTRODUCTION
THE NEED FOR BETTER CONTROL OF CHRONIC DISEASES
THE SCORECARD APPROACH
TARGET POPULATION AND ADVANTAGES
CONTENT OF THE TAKE CARE SCORECARD
CONSIDERATIONS FOR HEALTH AND FINANCIAL LITERACY SCORECARDS
LIMITATIONS
IMPLICATIONS FOR FINANCIAL LITERACY
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
ACKNOWLEDGMENT
Part Four: Investor Psychology
Chapter 18: Risk Perception and Risk Tolerance
INTRODUCTION
RISK PERCEPTION
THE RELATIONSHIP BETWEEN RISK PERCEPTION AND RISK TOLERANCE
AN OVERVIEW OF RISK TOLERANCE
MEASUREMENT OF RISK TOLERANCE
THE ROLE OF EMOTION IN RISK PERCEPTION AND RISK TOLERANCE
RISK-TAKING BEHAVIOR: THE INFLUENCE OF MARKET MOODS, BUSINESS CYCLES, AND ECONOMIC SHOCKS
UNRESOLVED ISSUES IN THE RISK DOMAIN
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Chapter 19: Emotions in the Financial Markets
INTRODUCTION
BEHAVIORAL FINANCE AND PROSPECT THEORY
EMOTIONS
EMOTIONS IN THE FINANCIAL MARKETS
EMOTIONAL FINANCE AND UNCONSCIOUS EMOTIONS
EMOTIONAL CORPORATE FINANCE—A FORMAL MODEL
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Chapter 20: Human Psychology and Market Seasonality
INTRODUCTION
MOODS, EMOTIONS, AND SENTIMENT
WEATHER, MOOD, AND MARKETS
DAYLIGHT, MOOD, AND MARKETS
DAYLIGHT SAVING TIME CHANGES, MOOD, AND MARKETS
ELATION, DEFLATION, AND MARKETS
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Chapter 21: Neurofinance
INTRODUCTION
NEUROSCIENCE PRIMER
RESEARCH METHODS
THE NEUROSCIENCE OF FINANCIAL DECISION-MAKING
THE IMPLICATIONS OF NEUROFINANCE RESEARCH FOR PRACTITIONERS
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Chapter 22: Diversification and Asset Allocation Puzzles
INTRODUCTION
HOUSEHOLD STOCK MARKET PARTICIPATION
CHANGES IN HOUSEHOLD PORTFOLIOS ACROSS TIME
DIFFERENCES IN HOUSEHOLD PORTFOLIOS ACROSS COUNTRIES
PORTFOLIO DIVERSIFICATION
HOUSEHOLD STOCK TRADING BEHAVIOR
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Chapter 23: Behavioral Portfolio Theory and Investment Management
INTRODUCTION
PROSPECT THEORY AND EXPECTED UTILITY THEORY
SAFETY-FIRST PORTFOLIO THEORY
SP/A THEORY
BEHAVIORAL PORTFOLIO THEORY
BEHAVIORAL ASSET PRICING MODEL
THE BAPM, CAPM, AND THREE-FACTOR MODEL
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Chapter 24: Post-Crisis Investor Behavior: Experience Matters
INTRODUCTION
BEHAVIORAL FINANCE FRAMEWORK
HISTORY DEPENDENT RISK TOLERANCE: THE COLLECTIVE MEMORY HYPOTHESIS
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Part Five: Trading and Investing Psychology and Strategies
Chapter 25: The Psychology of Trading and Investing
INTRODUCTION
PERSONALITY VARIABLES
AFFECT AND COGNITION
NEWS, RUMORS, AND MARKET MOOD
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Chapter 26: The Surprising Real World of Traders' Psychology
INTRODUCTION
WHAT SCIENCE REVEALS ABOUT HOW PEOPLE THINK
I NEED TO BE A HERO AGAIN
THE HEART OF A QUANT
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Chapter 27: Trading and Investment Strategies in Behavioral Finance
INTRODUCTION
DISTINCTION BETWEEN TRADING AND INVESTMENT STRATEGIES
ACTIVE VERSUS PASSIVE INVESTMENT STRATEGIES AND BEHAVIORAL FINANCE
AVERAGE INVESTORS SUFFER FROM BEHAVIORAL BIASES
PROBLEMS WITH TRADITIONAL INVESTMENT STRATEGIES
SHORT-TERM BEHAVIORALLY BASED TRADING STRATEGIES
LONG-TERM BEHAVIORALLY BASED INVESTMENT STRATEGIES
CURRENT AND FUTURE TRENDS IN BEHAVIORAL FINANCE STRATEGIES
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Part Six: Special Investment Topics
Chapter 28: Ethical and Socially Responsible Investing
INTRODUCTION
SOCIALLY RESPONSIBLE INVESTMENT
HISTORICAL EMERGENCE
INTERNATIONAL DIFFERENCES
INSTITUTIONAL HARMONIZATION OF FSR
SRI IN THE POST 2008−2009 WORLD FINANCIAL CRISIS ERA OF GLOBALIZATION
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Chapter 29: Mutual Funds and Individual Investors: Advertising and Behavioral Issues
INTRODUCTION
ADVERTISING AND PERFORMANCE
ADVERTISING, EXPENSES, AND FLOWS
ADVERTISING, EMOTIONS, AND CHOICE
BEHAVIORAL PERSUASION IN ADVERTISING AND CHOICE
EDUCATION, FINANCIAL KNOWLEDGE, AND CHOICE
EMOTIONS, BEHAVIOR, AND CHOICE
EMOTIONS, BEHAVIORAL FINANCE, AND CHOICE
FINANCIAL LITERACY AND ACTIVE MANAGEMENT
PRICE AND PERFORMANCE SENSITIVITY AND REPRICING
SENTIMENT CONTRARIAN BEHAVIOR AND ACTUAL PERFORMANCE
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHOR
Chapter 30: Real Estate Investment Decision-Making in Behavioral Finance
INTRODUCTION
THE REAL ESTATE MARKET AND THE GENERAL ECONOMY
REAL ESTATE MARKET AND FINANCIAL MARKET
INEFFICIENCIES AND THE REAL ESTATE MARKETS
OBSERVED INEFFICIENCIES IN REAL ESTATE MARKETS
SUMMARY
DISCUSSION QUESTIONS
REFERENCES
ABOUT THE AUTHORS
Answers to Discussion Questions
Index
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Library of Congress Cataloging-in-Publication Data:
Baker, H. Kent (Harold Kent), 1944-
Investor behavior : the psychology of financial planning and investing / H. Kent Baker and Victor Ricciardi.
pages cm. — (Kolb series)
Includes index.
ISBN 978-1-118-49298-7 (cloth); ISBN 978-1-118-72701-0 (ebk); ISBN 978-1-118-72702-7 (ebk)
1. Investments—Psychological aspects. 2. Finance—Psychological aspects. I. Ricciardi, Victor. II. Title.
HG4515.15.B34 2014
332.601′9—dc23
2013027577
Acknowledgments
Leonard Feather, the British-born jazz pianist, composer, and producer who was best known for his music journalism and other writing, once wrote “Finishing a good book is like leaving a good friend.” Whether he was speaking about finishing a book in the sense of reading or writing it is unclear. In either case, his sentiments are correct. As coeditors, we hope that you think Investor Behavior: The Psychology of Financial Planning and Investing is a “good book.” If so, many people merit credit. Foremost among them are the chapter writers who shared their knowledge and devoted countless hours to writing and revising their work. To them, we owe our special thanks. Also, the professional team at John Wiley & Sons deserves our appreciation for exhibiting a high degree of professionalism from inception through publication. We also want to recognize the support provided by the Kogod School of Business at American University and the Business Management Department at Goucher College. The editors dedicate this book to Linda Baker and Vito and Loretta Ricciardi. In particular, Professor Ricciardi would like to thank his parents for the support, encouragement, and love throughout his lifetime that made this book possible. He also acknowledges and thanks those who mentored him in pursuing a career as a finance professor: Igor Tomic, Anoop Rai, Hank Pruden, Bob Olsen, Hugh Schwartz, David Hua, Hamid Shomali, and Mike Jensen.
PART One
Foundations of Investor Behavior