Behavioral Finance and Wealth Management

I had started by reviewing or summarising the descriptions Pompian gave of various Biases and their impact on financial decision making. What may be better is to do a post specifically dedicated to each bias with links I can accumulate over time to various sources which review those biases.

Pompian follows a formulaic examination of each bias, discussion of it's implications, a test for determining whether a client has the bias, and steps to try and counter that. In the end, his proposal is to adjust for a balance between the optimal portfolio according to traditional Markowitz's Efficient Frontier style analysis. His focus is very much at the individual Independent Advisor Level. How can they understand their client's and adjust the client's portfolio to maximise the possibility that they will stick to the optimal allocation strategy. Once that strategy is in place, it would be a case of reviewing the strategy to make sure it is still correct (given unexpected life changes) but otherwise attempting to interfere as little as possible.

The book is useful introduction to Behavioural Finance, and opens the door to questions that need to be asked when providing advice.

I still have an uneasy feeling about an over-reliance on a system (MPT) that has as it's basis a belief that returns are normally distributed and uses Volatility as a definition of risk.

What I like about the book therefore, is not so much it's solution but the fact that it highlights a question.

Finance for a long time has tried to understand the question of the optimal strategy and how best to allocate assets. While that question has not yet been answered, the parallel discussion of how to best approach the emotional side of investing.