Implications of Investor Behavior

This presentation will address three main points. The first is background on the research that led to the field of behavioral psychology and prospect theory. We will outline relevant heuristics identified and explored by Kahneman, Tversky and others and how those heuristics affect decision making around investments. We will address how this research led to the field of behavioral finance, and how that compares with market efficiency theory. Finally, we address implications, derived from research conclusions and behavioral evidence, to the end investors. What do investors need to consider in order to successfully plan for and prepare against the inevitable biases that will creep into our investment decisions.

1. The research into how humans make decisions when faced with uncertainty can illuminate many of the pitfalls the individual may face in navigating their investments over the course of a lifetime.
2. Behavioral finance is a useful discipline to understand these pitfalls, but it does not provide a systematic way to exploit mistakes, if any exist, in market prices.
3. Recognizing that giving in to the urge to speculate can lead to less than optimal investment decisions.

Attendees should already be familiar with the basic theories of decision making and its effect (or lack thereof) on behavior, markets and investments. The presentation attempts to provide a deeper background on behavioral sciences and refute the idea that behavioral finance replaces efficient market theory, but rather they are both useful inputs to different parts of the investment plan. The presentation further provides the basis for a narrative for advisors to employ with end clients to help them cope with distractions and emotions with their own investment experience.