Behavioral Finance and Your Portfolio

PART IIIINFORMATION PROCESSING BIASES DEFINED AND ILLUSTRATED

In Chapters 3 through 22, 20 behavioral biases, both cognitive and emotional, will be discussed. There are two types of cognitive bias that are reviewed in Chapters 3 through 15. The first type of cognitive biases, belief perseverance biases were covered in Chapters 3 through 8. The second type, information processing cognitive biases, the focus of Part Three of the book, will be covered now in Chapters 9 through 15. Emotional biases are then covered in Chapters 16 through 22.

In these chapters, the same basic format is used to discuss each bias, in order to promote greater accessibility. First, each bias is named, categorized as emotional or cognitive, including subtype (belief perseverance or information processing), and then generally described. This is followed by the all-important concrete practical application, in which it is demonstrated how each bias has been used, or can be used, in a practical situation. The practical application portion varies in content, consisting of either an intensive review of applied research or a case study. Implications for investors are then delineated. A diagnostic test and test-result analysis follow, providing a tool to indicate the potential susceptibility to certain biases. Finally, advice on managing the effects of each bias in order to minimize its effects, is offered.