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Behavioral Finance and Wealth Management: How to Build Optimal Portfolios That Account for Investor Biases Hardcover – April 7 2006
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—Arnold S. Wood, President and Chief Executive Officer, Martingale Asset Management
Fear and greed drive markets, as well as good and bad investment decision-making. In Behavioral Finance and Wealth Management, financial expert Michael Pompian shows you, whether you're an investor or a financial advisor, how to make better investment decisions by employing behavioral finance research. Pompian takes a practical approach to the science of behavioral finance and puts it to use in the real world. He reveals 20 of the most prominent individual investor biases and helps you properly modify your asset allocation decisions based on the latest research on behavioral anomalies of individual investors.
From the Inside Flap
As a wealth manager and practitioner at the forefront of the practical application of behavioral finance, Michael Pompian understands the behavioral biases that investors have. Through his experiences, he has discovered specific ways to adjust investment programs for these biases, and now he shares these findings in Behavioral Finance and Wealth Management.
Comprising four distinct parts, Behavioral Finance and Wealth Management is a comprehensive guide to both understanding irrational investor behavior and creating portfolios for individual investors that account for these behaviors.
Part One provides a straightforward introduction to the practical application of behavioral finance. These chapters include an overview of what behavioral finance is on an individual level, a history of behavioral finance, and an introduction to incorporating investor behavior into the asset allocation process.
Part Two contains a detailed review of some of the most commonly found biases, complete with general and technical descriptions, practical applications, research reviews, implications for investors, diagnostic tests, and advice on managing the effects of each bias.
Part Three takes the concepts presented in the first two parts and pulls them together in the form of case studies, which clearly demonstrate how practitioners and investors can use behavioral finance in real-world settings.
Part Four explores some special topics in the practical application of behavioral finance, with an eye toward the future of what might lie ahead for the next phase of this discipline.
From the Back Cover
"Pompian is handing you the magic book, the one that reveals your behavioral flaws and shows you how to avoid them. The tricks to success are here. Read and do not stop until you are one of very few magicians."
Arnold S. Wood, President and Chief Executive Officer Martingale Asset Management
"I wish this book had been available a decade ago; by understanding behavioral biases, clients and professionals can stay focused and comfortable throughout the markets' bubbles and doldrums. Michael Pompian moves our profession forward by proposing a standardized structure for this approach."
Elizabeth K. Miller, CFA, Managing Director Trevor Stewart Burton & Jacobsen Inc., and former chair of the New York Society of Security Analysts' Wealth Management Committee
"Many inefficiencies in the market are the result of how investors let their emotions dictate their investment decisions. Michael Pompian's work provides a framework to understand why these inefficiencies exist, and how they can provide investors with significant profit-making opportunities."
Stanley G. Lee, CFA, Principal, David J. Greene & Company, LLC
"Michael Pompian has created a valuable resource for investors and those in the wealth management community by not only explaining a number of important behavioral biases, but also giving them actionable steps to reduce biases and improve investment performance."
John M. Longo, PhD, CFA, Senior Vice President Investment Strategy, the MDE Group, Inc., and Adjunct Professor of Finance at Rutgers University Graduate School of Management
- Publisher : Wiley; 1st edition (April 7 2006)
- Language : English
- Hardcover : 336 pages
- ISBN-10 : 0471745170
- ISBN-13 : 978-0471745174
- Item weight : 542 g
- Dimensions : 16.4 x 2.97 x 23.25 cm
- Best Sellers Rank: #1,419,038 in Books (See Top 100 in Books)
- Customer Reviews:
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The book contains minor mistakes here and there (mostly copyediting), and one major mistake: The author thinks that risk aversion is a fallacy or some form of irrationality. (This is clear in his remarks on pp. 214, 252.) In this, Pompian is implicitly rejecting a universally accepted principle of economics: the Law of Diminishing Marginal Utility (roughly, that the value of an additional dollar diminishes as your total wealth increases).
This is important, because this Law is the central reason, e.g., why it often makes sense to purchase insurance, why it makes sense to hedge bets, and why investors need to balance risk against potential reward. Failure to understand this could be a pretty serious problem for an investment adviser.
Pompian's book wins hands down from a practical viewpoint......how you can use behavioral finance findings as an investor or investment advisor. Pompian lists all 20 common biases, and then gives examples of how to deal with them. I also enjoyed his section on using Briggs Myers test results coupled with behavioral finance principles.....to develop better financial plans which fit people better.
Zweig's book is a fascinating read.......but when I got done......my question was.....How to I apply these behavioral finance findings to my investments or my client's financial plans? I would have to re-read Zweig's book......and develop the practical uses myself from his book.
It is interesting that Zweig's book at $17 has an Amazon sales rank of 2,075......and Pompian's book at $38 is only ranked 38,940. I have always enjoyed reading Zweig's columns in Money magazine. It is interesting to see where future research is headed in Zweig's book.......but in my opinion; you get more practical advice (or value) for the dollar from Pompian's book than Zweig's book.
To compliment this book.....I would suggest a couple good books on index fund investing and asset allocation.
The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing