i Financial Behavior F I N A N CI A L M A R K ETS A N D I N V E ST M E N TS S E R I E S H Kent Baker and Greg Filbeck, Series Editors Portfolio Theory and Management Edited by H Kent Baker and Greg Filbeck Public Real Estate Markets and Investments Edited by H Kent Baker and Peter Chinloy Private Real Estate Markets and Investments Edited by H Kent Baker and Peter Chinloy Investment Risk Management Edited by H Kent Baker and Greg Filbeck Private Equity: Opportunities and Risks Edited by H Kent Baker, Greg Filbeck, and Halil Kiymaz Mutual Funds and Exchange-Traded Funds: Building Blocks to Wealth Edited by H Kent Baker, Greg Filbeck, and Halil Kiymaz iii Financial Behavior PLAY ER S , S E R VIC E S , PR ODU C TS , AND MARKE TS H KENT BAKER GREG FILBECK and VICTOR RICCIARDI 1 Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide Oxford is a registered trade mark of Oxford University Press in the UK and certain other countries Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America © Oxford University Press 2017 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by license, or under terms agreed with the appropriate reproduction rights organization Inquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Library of Congress Cataloging-in-Publication Data Names: Baker, H Kent (Harold Kent), 1944- editor | Filbeck, Greg, editor | Ricciardi, Victor, editor Title: Financial behavior : players, services, products, and markets / [edited by] H Kent Baker, Greg Filbeck, and Victor Ricciardi Description: New York City : Oxford University Press, 2017 | Series: Financial markets and investments series | Includes index Identifiers: LCCN 2016036009 | ISBN 9780190269999 (hardcover) Subjects: LCSH: Investments—Psychological aspects | Investments—Decision making | Finance—Psychological aspects Classification: LCC HG4515.15 F56 2016 | DDC 332.601/9—dc23 LC record available at https://lccn.loc.gov/2016036009 9 8 7 6 5 4 3 2 1 Printed by Sheridan Books, Inc., United States of America v Contents List of Figures ix List of Tables xi Acknowledgments xiii Acronyms and Abbreviations xv About the Editors xix About the Contributors xxi Part One FINANCIAL BEHAVIOR AND PSYCHOLOGY Financial Behavior: An Overview 3 H KENT BAKER, GREG FILBECK, AND VICTOR RICCIARDI The Financial Psychology of Players, Services, and Products 23 VICTOR RICCIARDI Part Two THE FINANCIAL BEHAVIOR OF MAJOR PLAYERS Individual Investors 45 HENRIK CRONQVIST AND DANLING JIANG Institutional Investors 64 ALEXANDRE SKIBA AND HILLA SKIBA Corporate Executives, Directors, and Boards 79 J O H N R N O F S I N G E R A N D PAT TA N A P O R N C H AT J U T H A M A R D v vi Co ntents Financial Planners and Advisors 97 B E N J A M I N F C U M M I N G S Financial Analysts 118 SUSAN M. YOUNG Portfolio Managers 135 ERIK DEVOS, ANDREW C SPIELER, AND JOSEPH M TENAGLIA Financial Psychopaths 153 D E B O R A H W G R E G O R Y Part Three FINANCIAL AND INVESTOR PSYCHOLOGY OF SPECIFIC PLAYERS 10 The Psychology of High Net Worth Individuals 173 R E B E C C A L I -H U A N G 11 The Psychology of Traders 192 DUCCIO MARTELLI 12 A Closer Look at the Causes and Consequences of Frequent Stock Trading 209 MICHAL STRAHILEVITZ 13 The Psychology of Women Investors 224 M A R G U E R I TA M C H E N G A N D S A M E E R S S O M A L 14 The Psychology of Millennials 241 A P R I L R U D I N A N D C AT H E R I N E M C B R E E N Part Four THE PSYCHOLOGY OF FINANCIAL SERVICES 15 Psychological Aspects of Financial Planning 265 DAV E Y E S K E A N D E L IS SA B U I E vii C on t e n t s 16 Financial Advisory Services 285 J E R O E N N I E B O E R , PAU L D O L A N , A N D I V O V L A E V 17 Insurance and Risk Management 302 J A M E S M M O T E N J R A N D C W C O P E L A N D 18 Psychological Factors in Estate Planning 318 J O H N J G U E R I N A N D L PAU L HO O D J R 19 Individual Biases in Retirement Planning and Wealth Management 337 JAMES E BREWER JR AND CHARLES H SELF III Part Five THE BEHAVIORAL ASPECTS OF INVESTMENT PRODUCTS AND MARKETS 20 Traditional Asset Allocation Securities: Stocks, Bonds, Real Estate, and Cash 359 C H R I S TO P H E R M I L L I K E N , E H S A N N I K B A K H T, AND ANDREW C SPIELER 21 Behavioral Aspects of Portfolio Investments 378 N AT H A N M A U C K 22 Current Trends in Successful International M&As 397 NANCY HUBBARD 23 Art and Collectibles for Wealth Management 422 P E T E R J M AY Part Six MARKET EFFICIENCY ISSUES 24 Behavioral Finance Market Hypotheses 439 ALEX PLASTUN 25 Stock Market Anomalies 460 STEVE Z. FAN AND LINDA YU vii viii Co ntents 26 The Psychology of Speculation in the Financial Markets 481 VICTOR RICCIARDI 27 Can Humans Dance with Machines? Institutional Investors, High-Frequency Trading, and Modern Markets Dynamics 499 IRENE ALDRIDGE Part Seven THE APPLICATION AND FUTURE OF BEHAVIORAL FINANCE 28 Applications of Client Behavior: A Practitioner’s Perspective 523 HAROLD EVENSKY 29 Practical Challenges of Implementing Behavioral Finance: Reflections from the Field 542 G R E G B DAV I E S A N D P E T E R B R O O KS 30 The Future of Behavioral Finance 561 MICHAEL DOWLING AND BRIAN LUCEY Discussion Questions and Answers 579 Index 611 ix List of Figures 1.1 14.1 14.2 14.3 14.4 14.5 14.6 14.7 15.1 15.2 15.3 15.4 15.5 20.1 22.1 22.2 22.3 2.4 22.5 2.6 22.7 22.8 2.9 24.1 24.2 24.3 25.1 Main Types of Bias Affecting Traders’ Investment Decisions 194 Views of the American Dream, by Age Group 243 Knowledge Level for Investors by Age Group and Income 244 Survey Responses to Question about Retirement Planning 246 Degree of Advisor Use, by Age Group and Income 248 Generational Criteria for Making Investment Decisions 251 Client Familiarity with Investment Terms 257 Likelihood of Client Use of Financial Services via Technology 258 The Holon in Financial Planning 271 Components of Trust and Commitment 274 Major Factors for Building the Trust and Commitment Relationship 274 Technical Quality, Functional Quality, and Communication Effectiveness 275 Satisfaction and Trust as Antecedents to Commitment 276 Performance of U.S., International, and Emerging Market Stock Indexes 370 Reasons Given for Most Recent Acquisition from Executives of 50 International Companies 403 Views on Amount of Shareholder Value Gained from Most Recent Acquisition 406 Views on Competitive Advantage Gained from Most Recent Acquisition 407 Advance Planning Time for Domestic and International Acquisitions 411 Comparison of Time Spent on Synergistic Evaluations, Domestic and International Acquirers 412 Anticipated Synergies for Domestic and International Acquisitions 413 Top Three HR Concerns after Acquisition by Cross-Border Company 414 Time Needed to Appoint Senior Management after Company Acquisition 416 Stated Reasons for Acquisition Success 417 Randomly Generated Values 441 Gold Prices for Three-Month Period, 2006 442 Movement of DJIA between 2000 and 2013 449 Time Series of Annual Returns for Two Asset Growth Portfolios 466 ix 634 I nd ex rational and irrational behavior (Cont.) money shame, 341 mortality issues, 342 overconfidence, 341–342 target date fund strategy, 340 use of the word “smart,” 341 women, longer life expectancy, 236, 342 bounded rationality concept adaptive markets hypothesis (AMH), 444 defined, 5, 24 insurance purchasing decisions, risk tolerance, 304 managerial traits, 84 research programs, 563–564 frequent stock trading, 209, 210, 218 high net worth individuals (HNWIs), 183 insurance purchasing decisions, 313–316 mental accounting, 313–314 money emotions, 340–341 perspective behavioral bias driven irrationality, 567 manager’s rationalist perspective, 566–567 rationalist perspective, manager’s, 566–567 rationality/irrationality assumption adaptive market hypothesis and, 443–446 efficient market hypothesis (EMH), 441 fractal market hypothesis and, 446–448, 447t functional fixation hypothesis, 453–455 noisy market hypothesis, 452–453 rational manager/irrational investor, asset pricing, 570, 575 rational maximizer, 313 stock market anomalies, 470–471 rational maximizer insurance purchasing decisions, rational and irrational behavior, 313 real estate asset class, 360, 362–363 mortgage backed securities (MBS), 363 real estate investment trusts (REITs), 363 real estate investment trusts (REITs), 363 portfolio managers, prospect theory, 147 realistic optimism personal financial planning, strategies for overcoming biases, 280 realization utility of gains and losses nonstandard investor preferences, individual investors, 49 rebalancing strategies, asset allocation, 366 buy-and-hold strategy, 366 calendar balancing, 366 constant mix strategy, 366 recency bias, 309 financial crisis of 2007–2008 behavioral bias, impact of, 492 Reg FD financial analysts’ reports and forecast optimism bias, 120, 122–123, 125, 130 Registered Investment Advisers (RIAs), regulation of, 98–100 investment adviser representatives (IARs), 99, 100 required filings, 99–100 role of, 99–100 SEC and state regulators, 99–100 registered representatives, 100 regret aversion, 309 theory, 37 traders, information processing phase errors, 196 REITs See real estate investment trusts (REITs) religion, influence, 84 “rentiers” (Europe), 182 reporting analysts reports See financial analysts’ reports and forecast optimism bias art and collectibles, management and reporting, 429 client management, framing and, 540 pre-experiment research protocols and registered replication reports, 574 representativeness bias, 25–26, 310 book-to-market equity and, 26 concept explained, 25–26 institutional investors, 68 overreaction hypothesis, 451t personal financial planning, 279 risk-return relationship, 26 speculation in financial markets, 489–490 traders, information processing phase errors, 195 underreaction hypothesis, 452 reputation concerns financial analysts’ reports and forecast optimism bias, 119, 122, 126, 127, 129 institutional investors, 71 research asset pricing See asset pricing, future of investor psychology research future of See research and researchers, future of future philosophy See philosophy of future behavioral finance research generally, 285–286 improving reliability See research data and methodologies, improving reliability programs See research programs publishing See publishing behavioral finance research research and researchers, future of, 20, 561–575 asset pricing research, 561, 569–572, 575 current primary focus of CEO’s role, 561, 567–568, 575 issues with, 567–568 experimental finance asset pricing research, theory building, 570 improving reliability, communication infrastructure improvements, 574 improving reliability, 572–574 perspective, 566–569 635 I n dex behavioral bias driven irrationality, 567 interpretivist perspective/methodologies, 565–566 paradigm shifting, 562–563 positivist perspective, 565 primacy of philosophical perspective, 562 rationalist perspective, manager’s, 566–567 philosophy of future behavioral finance, 562–566 publishing behavioral finance research failure to develop productive research and publishing bias, 569 publishing of purely theoretical research, limited outlets, 565 statistics, 564, 565t recommendations for increased familiarity with CEO, CFO, and management team, 568 coercive isomorphism, 568 cultural differences and behavioral biases, 568–569 mimetic isomorphism, 568 organizational theory, 568 research programs, 563–566, 575 research data and methodologies, improving reliability, 572–574 availability of datasets and clear methodology, journal authors, 574 communication infrastructure improvements, 574 insuring reliable research, solutions, 574 pre-experiment research protocols and registered replication reports, 574 replication or reproducibility of research, issues concerning, 572–573 secret data, 572, 574 solid core of theory and improved methodologies, 573–574 research programs, 563–566, 575 bounded rationality concept, 563–564 degenerative research programs, 563 progressive research programs, 563, 564, 575 publishing of purely theoretical research, limited outlets, 565 traditional finance, reduced criticism of, 564, 566 residual losses, 103–104 resoluteness, CEOs, 88 retail investors See also individual investors skewness preference, 49 sophistication level of, 64 retainer fees agency costs in financial advice, 106–107 retirees, client management, 537–540 retirement planning, 16, 337–353 See also pension plans; retirement planning professionals biases creating need for financial planning, 338–342, 353 illusion of control, 339 intuition, evaluating validity of, 338–339 irrational financial behaviors, 339–342 anchoring, 342 635 anchoring on investment names, 340 availability bias, 342 financial milestones, 340 gender bias, 341–342 herding, 342 money emotions, 340–341 money languages, 341–342 money shame, 341 mortality issues, 342 overconfidence, 341–342 target date fund strategy, 340 use of the word “smart,” 341 women, longer life expectancy, 236, 342 ostrich effect, 339 present bias, 339, 345 salience bias, 339 status quo bias, 339 “unbiased” self-assessments, 339, 353 Certified Financial Planners (CFPs), 338, 343–344, 351, 353 emotional vs expressive relationship, 337 enhancing wealth through nudges, 350–353 employer nudges, 350–351 financial planner nudges, 351–353 fiduciaries, 338 hot investments, reframing techniques, 537 investment strategies, biases and behaviors leading to faulty planning, 346–350 conflicting social values, 347–348 faulty investment selection, 348 inadequate tax planning, 349–350 limited diversification, 347 one-sided investment plans, 347 stress on market timing, 348–349 unbalanced investment review, 349 millennials, 243–244, 246–247, 246f negative emotions within financial decision making, 34 nudging concept, 337–338 employer nudges, 350–351 enhancing wealth through nudges, 350–353 financial planner nudges, 351–353 status quo bias, 9, 372 ultra-high net worth (UHNW) millennials, 246 utilitarian focus of economics, 337 women investors, 236 retirement planning professionals biases in decision to hire, 342–344, 353 competency, 343–344 generally, 342–343 honesty, 344 reliability, 344 term “financial advisor,” 343 training and knowledge, 342–343 trust, 343 Certified Financial Planners (CFPs), 338, 343–344, 351, 353 return drag, 363 636 I nd ex return objectives asset allocation, 360, 364–365 mental accounting bias, 364 return-volatility relation exchange-traded funds (ETFs), 387 reversion to the mean, 492 RIAs See Registered Investment Advisers (RIAs), regulation of risk and return, inverse relationship, 24–25, 38 risk-as-feelings hypothesis, 31 frequent stock trading, 213 risk aversion, 4 attitudes towards, 304, 307 capital asset pricing model (CAPM), development of, 4 CEOs, 87, 92 efficient market hypothesis (EMH), 4 vs loss aversion, 534 managerial risk aversion, 86 portfolio choice, 4 women investors, 232–233 risk capacity efficient frontier hypothesis (EFH), anchoring on client education, 525 risk coaching See client education risk exposure pension funds, 391 risk management See insurance purchasing decisions risk mitigation art and collectibles, 429–430 risk perception bias, 24, 38–39 assessment of, 24 bounded rationality, defined, 24 CEOs, 87 defined, 24 managerial traits, 84 satisficing, 24 worry and, 35–37 risk requirement efficient frontier hypothesis (EFH), anchoring on client education, 525, 526 risk-return tradeoff, 26 asset allocation, 364–365 efficient frontier hypothesis (EFH), anchoring on client education, 524, 524f rational explanation for stock market anomalies, 470–471 representativeness bias, 26 risk-sharing problem agency theory, 80–81 risk-taking behavior, 24–25 See also risk-return tradeoff; risk tolerance; systematic risk (undiversifiable risk) anchoring risk See client education applicability of, 24 arbitrage, stock market anomalies, 472–473 idiosyncratic risk, 472–473 systematic risk, 472 aversion See risk aversion baby boomers, 492 client management, 537 conduct risk, 556 consumer biases, strategies for overcoming, 294 financial advisory services, consumer bias, 292 financial crisis of 2007–2008 behavioral bias and, 491–492 frequent stock trading, 211–212 gambling disorder and frequent stock trading, 211–212, 215–218, 219 hazards, 303 incentive-based compensation, CEOs, 86–87 millennials, 492 moral hazards, 303–304 nature of risk, 303–304 objective risk, 303 perception See risk perception bias perils, 303 physical hazards, 303 portfolio managers, 142–146, 149 precautionary savings, 492 pure risk, 303 responses to risk aversion See risk aversion risk neutral, 307 risk seekers, 307 risk transfer, 304, 305 reversion to the mean, 492 risk and return, inverse relationship, 24–25, 38 risk need exceeds risk tolerance, 527, 527f risk perception See risk perception bias subjective risk, 303 testosterone levels and frequent stock trading, 214 individual investors, 47 women investors, 232 and uncertainty disposition effect, 7 emotional loss, 6–7 loss aversion, 6–7 prospect theory, 6 women investors, 232 risk-taking tools consumers of financial advisory services, strategies for overcoming biases, 294 risk-taking tools, strategies for overcoming biases, 294 risk tolerance efficient frontier hypothesis (EFH), anchoring on client education, 525 insurance purchasing decisions, 302–304 investment preferences and millennials, 250–251, 251f women investors, 232–233 risky-shift effect (group polarization) 637 I n dex speculation in financial markets, 485–487 robo-advisors client familiarity with term, 257f consumers of financial advisory services, strategies for overcoming biases, 296–297 financial advisory services, 296 high net worth individuals (HNWIs) and, 184 human advisors vs., 184 millennials, 256–257, 260 safety vs certainty capital asset pricing model (CAPM), client education, 529 safe withdrawal rate strategic dimension of personal financial planning, 270 salience bias financial planning, 339 “sandwich generation” millennials, 257 women investors, 237 satisficing, 7–8 risk perception bias, 24 traders, decision making process, 193 scenario planning strategic dimension of personal financial planning, 269 seasonal and weather related conditions See also emotional bias institutional investors, 73–74 SEC registered exchanges, statistics, 499 self-affinity bias, 31 self-assessments, “unbiased,” 339, 353 self-attribution bias CEOs, 88 mergers and acquisitions, 88 mutual funds, underperformance of, 383 stock market anomalies, 473 traders, 199 self-control bias, 29 sensitivity simulations strategic dimension of personal financial planning, 269 sentiment See investor sentiment short-selling, 137 single behavior tendency academic lift and drop application approach, 547–548 goal-based investing, 547 mental accounting, 548 size anomaly (market size anomaly), 469 skewness preference individual investors, 49 lottery-type stocks and options, 49 retail investors, 49 “smart” use of the word, financial planning, 341 637 snakebite effect traders, 200 social capital and trust, 54–55 social finance individual investors, 56 social identity of individual investors, 54 social interaction individual investors, social context, 53–54 social media See also technology better tools, better data, 433 e-commerce, role of, 433 globalization, 431–432 influence on wealth management, 430–434 investor sentiment, 202–203 millennials, 255–256, 256t online businesses and transparency, 433–434 relationships, business to business (B2B) vs consumer to consumer (C2C), 432–433 social psychology asset pricing, future of investor psychology research, 569 social values conflicting, investment strategy leading to faulty planning, 347–348 individual investors, 54 societal benefits of personal financial planning, 265 speculation in financial markets, 18–19, 481–495 behavioral aspects, 483–491 efficient market hypothesis (EMH) and, 481 excitement/euphoric expectation, 490 familiarity bias, 489–490 grandiosity, 490 group polarization (risky-shift effect), 485–487 groupthink behavior, 487–489 herd behavior, 484–485 home bias, 489 local bias, 489 optimism, 490 overconfidence, 483, 490 overreaction and underreaction, 490–491 representativeness bias, 489–490 financial crisis of 2007–2008, behavioral biases evident following, 481, 482, 491–494 anchoring, 492 collective memory hypothesis, 491 lasting influence of economic shocks, 491–492 loss aversion, 493 recency bias, 492 status quo bias, 493 trust and mistrust in a financial setting, 493–494 worry, 492 historical background, 482–483 Internet bubble, overconfidence and, 483 portfolio managers, herding behavior, 141 638 I nd ex sports card collections, 425 status quo bias (inertia), 9, 23, 308 asset allocation, 371–372, 375 financial crisis of 2007–2008, impact of, 493 financial planning, 339 loss aversion and, 371–372 retirement accounts, 372 retirement plans, 9 traders, information processing phase errors, 198 stewardship theory, 79, 81–82, 92 agency theory, differentiating factors, 82–83 behavior assumptions, 83 stock market developments See equity market developments generally See equity exchanges, generally stock market anomalies, 18, 460–475 accrual anomaly, 469–470, 469f behavioral biases arbitrage, limits of, 472–473 disposition effect, 474–475 idiosyncratic risk, 472–473 limited attention, 474 overconfidence, 473 prospect theory, 474–475 self-attribution, 473 sentiment, 475 identification of anomalies, 563, 566 investment anomalies, 465, 466f, 467f momentum anomalies, 468–469, 468t size anomaly (market size anomaly), 469 summary statistics (by country & anomaly), 460–461, 462t–464t types of, 460, 461–470 value anomaly, 465–466, 471 why they exist, 470–475 behavioral explanation, 471–475 rational explanation, 470–471 stock market aversion individual investors, social context, 54 stock market data See order-by-order market data stock recommendations, market regulation, 121 stock trading, frequent See frequent stock trading stop-loss order, 197 strategic asset allocation (SAA), 365–366 subjective and objective issues influencing decision making, 5 substance abuse, role of psychopaths, 155–156 success frame and positive frame, 27 suitability standard, 103 supply side financial advice, 287–289 added value of advice, 288–289 brokers, defined, 287 consumer biases, strategies for overcoming, 293–296 financial advisor, 287 financial planners, 287 investment advisor, 287 purpose of advice, 287–288 vertical integration or tie-up, 287 wealth managers, 287 who offers advice, 287 systematic risk (undiversifiable risk) arbitrage, stock market anomalies, 472 asset allocation, risk–return trade-off, 365 capital asset pricing model (CAPM), client education, 528–529 generally, 303 unsystematic risk, 303 tactical asset allocation (TAA), 366 takeovers CEOs, overconfidence, 87–88 directors, 90 target date fund strategy, 340 tax planning, inadequate investment strategy leading to faulty planning, 349–350 technology See also robo-advisors; social media digital technology and data analytics advancements, application opportunities, 552 financial advisory services robo-advisors See subheading robo-advisors, below technology driven advice, 292, 296–297 frequent stock trading, 218 individual investors, social context, 55–56 millennials and financial information, 255–259 online trading and investment platforms daily returns, display of, 557 financial advisory services, 292, 296–297 individual investors, social context, 55–56 novice traders, simulations, 204 speculation, 483 trader’s overconfidence, impact on, 198 trading frequency, 56, 198 psychopathy, emergence in financial environment, 164 terror management theory, 325–326 testosterone levels and risk-seeking behavior frequent stock trading, 214 individual investors, 47 women investors, 232 toxic limit orders, 501 toxic liquidity (opportunistic liquidity), 500–501 flickering, 502 institutional investors and, 501–502, 504, 505 tracking errors index mutual funds, 384 trade boosting, economic incentives of, 121 traders, 14, 192–205, 194 See also frequent stock trading 639 I n dex biases of availability cascades, 199 cognitive bias, 193–194, 194f conformity effect, 199 conservatism in expectations, 199 contrarian strategies, 200–201 disposition effect, 200 expectation extrapolation, 199 gregarious and contrarian strategies, distinguished, 200–201 herding, 199 momentum type strategies, 199–200 self-attribution bias, 199 snakebite effect, 200 social biases, 194, 194f, 199–201 day traders, behavior of, 213–214 decision making process algorithmic trading, 193 biases affecting, 193–201, 194f cognitive bias, 193–195 emotional bias, 194, 195–198 generally, 192–193 neoclassical theory of financial decision making, 193 satisficing, 193 social bias, 194, 199–201 disposition effect information processing phase errors, 196–197 social biases, 200 efficient market hypothesis (EMH), 192 emotional bias, 194, 194f information collection phase, errors in, 194–198 information processing phase errors, 194f, 195–198 investor sentiment action style indicators, 201–202 “market psychology,” 201 market sentiment, 201 opinion-style indicators, 201–202 role of media, 201–203 sentiment indicators, 201–203 social media platforms, 202–203 momentum type strategies, 199–200 conservatism in expectations, 199 expectation extrapolation, 199 novice traders, simulations and behavior of, 203–205 professional traders and retail traders, distinguished, 192 traditional asset management firms portfolio managers, risk-taking behavior, 143–144 traditional economic theory insurance purchasing decisions, 302, 315 traditional finance theory, 3–4 basic premise, 3 639 vs behavioral finance, high net worth individuals (HNWIs), 182 capital asset pricing model (CAPM), development of, 4 efficient market hypothesis (EMH), 4 vs modern finance, differences, 45, 56 portfolio choice, 4 reduced criticism of, philosophy of future behavioral finance, 564, 566 risk aversion, 4 utility theory, 3–4 transference communications with clients, estate planning, 323–324 transformational acquisitions international mergers and acquisitions (M&As), current trend, 400 transmission protocol, 505–506, 506t trust client trust and commitment, personal financial planning, 272–277 building trust and commitment relationship, 274–275, 274f communication dimension, 276–277 communication effectiveness, 275, 275f components of trust and commitment, 273–274, 274f factors influencing, 273–275 functional conflict, 273 functional quality, 275, 275f high credence services, client difficulty assessing, 273 positive outcomes, 273 referrals, 273 satisfaction, role of, 275–276, 276f satisfaction and trust as antecedents to commitment, 276, 276f technical quality, 275, 275f consumers of financial advisory services downside of trust, 291 role of trust, 290–291 between financial professional and client, 31 hedge funds, 390 high net worth individuals (HNWIs), 184–185 index mutual funds, 385 millennials and financial advisors, 250 mistrust in a financial setting financial crisis of 2007–2008 behavioral bias, impact of, 493–494 in receiving fair returns for economic transactions individual investors, social context, 55 retirement planning professional, biases in decision to hire, 343 role of trust financial advisory services, consumer bias, 290–291 640 I nd ex 12b-1 fees, 104, 105 Twitter See social media ultra-high net worth (UHNW) See also art and collectibles; millennials designation, 176 unbalanced investment review investment strategy leading to faulty planning, 349 “unbiased” self-assessments, 339, 353 illusion of control, 339 ostrich effect, 339 present bias, 339, 345 salience bias, 339 status quo bias, 339 under-diversification See diversification bias underreaction hypothesis, 450–452 conservatism bias, 452 positive autocorrelation, 450 reasons for underreaction, 452–453 representativeness, 452 undiversifiable risk See systematic risk (undiversifiable risk) United States, private wealth management, 177–178 United States v. South-Eastern Underwriters Association (Supreme Court case), 101 utilitarian focus of economics, 337 utility theory, 3–4 value anomaly, 465–466, 471 value generating biases institutional investors, 65 values See social values vertical integration or tie-up, 287 wealth accumulation high net worth individuals (HNWIs), 174–175 wealth management, 344–346 See also high net worth individuals (HNWIs); retirement planning aspects of financial planning, 344–346 financial status and stability, 344–345 narrow framing, 345, 346 oversimplification, 346 present bias, 339, 345 enhancing wealth through nudges, 350–353 employer nudges, 350–351 financial planner nudges, 351–353 financial status and stability, 344–345 narrow framing, 345, 346 oversimplification, 346 present bias, 339, 345 social media’s influence on, 430–434 better tools, better data, 433 collection management tools as wealth tools, 434 e-commerce, role of, 433 globalization, 431–432 holdings as commodities, 430 online art education, 432 online auctions and marketplaces, 432 online businesses and transparency, 433–434 relationships, business to business (B2B) vs consumer to consumer (C2C), 432–433 wealth managers, 287 The Wealth of Nations, 186 weather and seasonal related conditions See also emotional bias institutional investors, 73–74 wills, 318 See also estate planning wine collections, 424–425 The Wolf of Wall Street, 153 women investors, 14, 224–237 emerging influence and affluence of, 224–227 acquisition of individual wealth, 225 educational attainment, 225 female entrepreneurs, 226–227 leadership of women, 225–226 transfer of wealth, 227 financial advisors’ treatment of, 231, 238 communication courses for advisors, 237 communication with, 228–229 as invisible partner, 230–231 financial concerns for, 235–236 caregiving, 230, 231, 233, 236, 237 hardships, dealing with, 234 as head of households, 225, 231, 233 life expectancy, increased, 236, 342 retirement savings, compared to men, 236 “sandwich generation,” 237 wage discrimination, 236 financial crisis of 2007–2008, impact of, 232–233, 234 financial industry careers, gender inequality, 235, 237 customer loyalty, 229–230 dissatisfaction with, 227 financial wellness, closing gender gap, 236 investment psychology, 227–236 cortisol, stress hormone, 232 customer loyalty, 229–230 financial concerns, 235–236 financial literacy, 233–234, 237 generally, 227–229 lack of confidence, 230–231 male vs female brain, differences between, 231–232 market volatility, 232 risk aversion, 232–233 641 I n dex risk-seeking behavior, 232 risk tolerance, 232–233 success and failure, defining, 234–235 testosterone and risk-seeking behavior, 232 worry, 35 financial crisis of 2007–2008 behavioral bias, impact of, 492 risk perception and, 35–37 wrap accounts, 105 Yale model (endowment model), 142 641 643 645 647 ... Greg, editor | Ricciardi, Victor, editor Title: Financial behavior : players, services, products, and markets / [edited by] H Kent Baker, Greg Filbeck, and Victor Ricciardi Description: New York City... including: behavioral finance, financial history, behavioral economics, and behavioral accounting He received a BBA in accounting and management from Hofstra University and an MBA in finance and Advanced... Journal of Financial Planning and contributed chapters to the first and second editions of the CFP Board’s Financial Planning Competency Handbook and Investor Behavior: The Psychology of Financial