DECISION MAKING BIASES IN PERSONAL FINANCE OBJECTIVES • Reality check. Financial professionals and their clients are both constrained by their decision-making biases. • 3 Behavioral Finance biases affecting counselors and their clients: Confirmation Bias, Overconfidence, and Loss Aversion. • Strategies for mitigating the effects of these specific biases, and cognitive biases in general. Q and A. References for further…
Financial liquidity describes the ability to buy or sell something quickly at a fair price. An illiquid asset cannot be so easily sold. For example, real estate is typically an illiquid asset. You may have to wait months to get the price you want. There are three components to the liquidity of securities in general, and stocks specifically: The first is the…
Asset allocation, at its most basic level, is deciding how to spread (allocate) the risk across your investment portfolio: stocks vs. less-risky instruments such as bonds and certificates of deposit (CDs). These decisions will be the primary determinant of your investment performance; i.e., your portfolio’s rate of return. Beyond this seemingly simple decision, you must consider how much to invest in domestic stocks, international…
If you (or someone you know) are having difficulty repaying a loan, consider asking for forbearance. It will likely prove to be the best gift you receive this holiday season. This is a concept that is rarely, if ever taught, in business school. Many (most) college educated individuals in finance may not be familiar with it. Enjoy, and share our discussion of…
FINANCIAL LITERACY AND THE TIME VALUE OF MONEY With interest rates near 14-year highs, we should revisit the phrase, “Time is Money.” You may have even used the phrase yourself. It has special meaning when applied to investing and financial planning. Lyle and I are happy to present our “Time Value of Money” lesson, taken directly from Your Total Wealth. …
Whether you agree or disagree with President Biden’s Student Loan Forgiveness Plan, it is useful to think of it in relation to the usual ways that credit is granted, and the expected payback of loans. That is why we posted the “5 Cs of Credit,” one of the 74 essential concepts in Your Total Wealth. Because financial advisors and bankers…
Confirmation Bias is the third article in our trilogy of behavioral finance biases affecting financial advisors and their clients. Indeed… that is one of the reasons Smart People Do Stupid Things… Feel free to download copies for yourself, your colleagues and your clients. CONFIRMATION BIAS A BEHAVIORAL FINANCE BIAS AFFECTING ADVISORS AND THEIR CLIENTS David Dubofsky, PhD, CFA Lyle Sussman,…
LOSS AVERSION: A BEHAVIORAL RISK FOR BOTH FINANCIAL ADVISORS AND THEIR CLIENTS David Dubofsky, PhD, CFA Lyle Sussman, PhD You win some and you lose some. For a moment think about how often you’ve heard or used that phrase. Maybe you said it to someone who was just denied a promotion. Or possibly someone said it to you after you lost…
David Dubofsky, PhD, CFA and Lyle Sussman, PhD The increasing interest in decision making biases affecting the financial world can best be documented with this metric: A Google search of the phrase “Behavioral Finance” yields over 5 million hits. A cursory scan of a sample of those links highlights overconfidence as a significant bias affecting both investors and their advisors. Overconfidence…
Clients of Financial Advisors and Wealth Managers hear a lot today about the Federal Reserve. Unfortunately many of those clients, and people in general, may not know what it does and how it affects their daily personal finances. Here’s a sample of “Central Bank,” one of the key terms we explain in our book, “Your Total Wealth,” to help you…