CHAPTER 5Diagnostic Tests for Investment Personality

Systematically wrong decisions can result from the influence of at least four factors: limited financial knowledge, untypical investment experience, and psychological and emotional factors. In the following, we briefly discuss the importance of these factors and we show how advisors can elicit the factors' potential impact on the clients' investment mistakes. The latter can be used as a basis for the structure of the clients' portfolios and for the optimal degree of delegation of responsibilities along the investment process.


Fritz Müller is desperate. Again, he lost more than half of his wealth with investments in stocks. During the summer 2009, he closely followed the media's sensational coverage of the dramatic rescue of UBS. He and his friends talked about it when they met up for coffee or an after‐work drink. As a result, he bought shares of Credit Suisse and UBS at a price of 50 CHF, respectively, 20 CHF because he was convinced that after the financial crisis 2007–2008 they had reached the absolute bottom (Credit Suisse depreciated from 75 CHF to 25 CHF and UBS from 80 CHF to 20 CHF) and then he wanted to pick the nice rebound to come. But then came the summer 2011 in which the crisis of the euro turned into a tragedy. Even though Credit Suisse and UBS are Swiss banks their share prices were drawn into the dramatic sell‐off of financial stocks in Europe: Credit Suisse shares fell to 20 CHF while ...

Get Behavioral Finance for Private Banking, 2nd Edition now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.