Behavioral Finance for Private Banking From the Art of Advice to the Science of Advice

CHAPTER 1

Introduction 1

CHAPTER 2

Behavioral Biases 5

2.1 Information Selection Biases 6

2.2 Information Processing Biases 11

2.3 Biases after Receiving Feedback 31

2.4 Are More Heads Smarter Than One? 33

2.5 Summary of Biases 35

2.6 Conclusion 39

CHAPTER 3

Cultural Differences in Investors’ Behavior 41

3.1 What Is Financial Culture? 41

3.2 The INTRA Study 43

3.3 Conclusion 46

CHAPTER 4

Neurological Foundations and Biases’ Moderation 47

4.1 The Human Brain 47

4.2 Insights for Behavioral Finance 48

4.3 Moderation of Biases 49

4.4 Conclusion 50

CHAPTER 5

Diagnostic Tests for Investment Personality 51

5.1 A Case Study 51

5.2 Design of Diagnostic Questionnaires 52

5.3 Knowledge and Investment Experience 53

5.4 Psychology and Emotions 59

5.5 Client’s Diagnostic Profile 65

CHAPTER 6

Decision Theory 69

6.1 Introduction 69

6.2 A (Very) Short History of Decision Theory 70

6.3 Expected Utility 73

6.4 Mean-Variance Analysis 76

6.5 Prospect Theory 78

6.6 Rationality of Mean-Variance and Prospect Theory 87

6.7 The Optimal Asset Allocation 91

6.8 Comparing the Decision Theories 102

6.9 Conclusion 103

CHAPTER 7

Product Design 105

7.1 Introduction 105

7.2 Case Study 107

7.3 Theory of Product Design 114

7.4 Structured Products Designed by Customers 120

7.5 Conclusion 123

CHAPTER 8

Dynamic Asset Allocation 125

8.1 Time Diversification 126

8.2 Rebalancing 129

8.3 Conclusion 134

CHAPTER 9

Life-Cycle Planning 137

9.1 Case Study 137

9.2 Case Study Werner Bruni 139

9.3 Consumption Smoothing 140

9.4 The Life-Cycle Hypothesis 141

9.5 The Behavioral Life-Cycle Hypothesis 143

9.6 Conclusion 146

CHAPTER 10

Risk Profiling 147

10.1 Risk-Profiling Methodologies 148

10.2 Comparing Risk-Profiling Methodologies 151

10.3 A Case Study 152

10.4 The Risk Dimensions 153

10.5 Behavioral Risk Profiler 155

10.6 Risk Profiling and Its Regulation 166

10.7 Conclusion 167