Investor Behavior: The Psychology of Financial Planning and Investing

CHAPTER 11

Policy-Based Financial Planning: Decision Rules for a Changing World

Dave Yeske, CFP®

Managing Director, Yeske Buie, and Distinguished Adjunct Professor, Golden Gate University

Elissa Buie, CFP®

CEO, Yeske Buie, and Adjunct Professor, Golden Gate University

INTRODUCTION

Although the field of behavioral finance helps to provide a deeper understanding of the cognitive biases present when individuals make financial decisions, practitioners need not only understanding but also practical tools. Policy-based financial planning is one such tool, offering a framework and approach that allows practitioners to craft decision rules that can keep clients committed to a consistent course of action in a seemingly chaotic and unpredictable world. Hallman and Rosenbloom (1975, p. 4), who first articulated the concept of policy-based financial planning, describe personal financial policies as follows:

Also involved in the planning process is the development of personal financial policies to help guide a person's financial operations. An example of such policies in investments would be deciding what percentage of an investment portfolio is to go into bonds (or other fixed-dollar securities) and what percentage into common stocks (or other equity-type investments). Another example, involving life insurance, is that a consumer may want to purchase mainly cash-value life insurance or decide to buy mostly term life insurance and place the savings dollars elsewhere. Unfortunately, many people ...