Behavioral Finance and Investor Types: Managing Behavior to Make Better Investment Decisions

Chapter 15

Investment Advice for Each Behavioral Investor Type

We should take care not to make the intellect our god; it has, of course, powerful muscles, but no personality.

—Albert Einstein

We are at the last chapter and now ready to apply everything we have learned in the book, especially what we have learned in the last three chapters. In this chapter we go about the task of creating an asset allocation program that is modified for each behavioral investor type. In Chapter 12, we learned about how the capital markets operate and how to invest via asset classes. In Chapter 13, we learned about asset allocation and how to create an investment plan. In the previous chapter, we learned about the importance of financial planning and how it can be critical to investing success. In this chapter, we put it all together and demonstrate how to modify an investment plan for each behavioral investor type. We start with an introduction to the concept of behaviorally modified asset allocations (BMAA), which is also referred to as best practical allocation.

For today's financial advisor, private banker, or generalist wealth management practitioner (hereafter “financial advisor”), creating viable and unique investment solutions in response to the array of financial situations and personalities clients present is the heart and soul of the job. Sometimes the job is easy: The client being advised appears rational in his or her approach—that is, he or she seems to understand the importance of ...