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13 June 2019 Financial Analysts Journal Book Review

Financial Behavior: Players, Services, Products, and Markets (a review)

  1. Martin S. Fridson, CFA

This multi-author volume ranges well beyond the topic evoked by its title—namely, behavioral finance. It summarizes a number of intriguing findings of recent investment research, many of which contradict conventional wisdom. The practitioners most likely to find the book’s contents applicable to their work are financial planners and private wealth managers.

Investment professionals will likely deduce from this book’s title, Financial Behavior, that it deals with behavioral finance. That inference is correct, but the book’s full scope is considerably broader. Among the many other topics it covers are the psychology of women investors and millennials, behavioral aspects of investing in collectibles, and financial psychopaths. (The chapter covering the last topic cites one researcher’s opinion “that the stock exchange itself would be his preferred location to study psychopaths outside the prison environment.”)

Within the chapters dealing specifically with behavioral finance, the enumerated cognitive and emotional errors are already familiar to CFA charterholders from the CFA Program exam curriculum. Anyone who reads the book from cover to cover will grow considerably more familiar with them. Several chapters begin with miniature primers on behavioral finance, a repetition that arises from the book’s structure as a compilation of articles by multiple authors.

Although some of Financial Behavior’s content may be old hat, a number of recent research findings recounted by the contributors will be news to most investment professionals. For instance, one study found that individuals with certain types of brain damage, which render them incapable of experiencing anxiety or fear, achieve higher returns in an investment simulation than investors in normal and control groups. Another team of researchers concluded that in US regions where the Catholic/Protestant ratio is high, the propensity of investors to own lottery-like stocks is greater than elsewhere in the United States.

The book’s contributors cite a plethora of studies with intriguing results that frequently contradict conventional wisdom. For example, they report that investment clubs underperform the market by a wider margin than individuals do. Individuals, one team of researchers found, perceive better value and less risk in the stock market when the political party they favor is in power. Close followers of financial research probably will not be surprised to learn that US institutional investors are 46% overweighted in domestic equities. They may not expect to read, however, that according to a recent study, portfolios that are underdiversified, compared with the optimal efficient world market portfolio, achieve higher risk-adjusted returns than their globally diversified counterparts.

Findings on a wide range of topics, from the genetic basis of performance chasing to the superior investment results of women mutual fund managers, will interest a wide variety of investment professionals. Financial planners and private wealth managers, though, are the practitioners most likely to find the content of Financial Behavior applicable to their work. For instance, one chapter emphasizes that clients will not follow a financial plan that focuses solely on such items as assets, expenses, and tax circumstances. The authors offer ways of broadening the client data-gathering process to include beliefs and values. Another chapter focuses on the practical challenges of implementing behavioral finance, viewing it as a companion to traditional approaches rather than a methodology to be used in isolation.

Harold Evensky, who has been dubbed “the dean of financial planning,” provides a highly practical tip on discouraging futile attempts to time the market: Ask the client to name the top 10 artists or top 10 athletes of all time. Most individuals have opinions on those matters. Then ask the client to name the top 10 market timers of all time, or the top 5, or even a single top market timer. The client’s inability to supply a name drives home the point that if successful market timers existed, people would know their names.

H. Kent Baker (Kogod School of Business at American University), Greg Filbeck (Penn State Erie, The Behrend College), and Victor Ricciardi (Goucher College) have done an estimable job of editing this lengthy volume. Inevitably, though, a few minor errors made it past the final review. One contributor repeatedly refers to the consulting firm Capgemini as “Gapgemini.” She wisely stops short of asserting that baseball star Yogi Berra said, “It’s difficult to make predictions, especially about the future,” instead merely stating that he was reputed to have said it. More thorough research would have disclosed that the earliest known record of this jest is a speech by the Danish politician Karl Kristian Steincke (1880–1963).

Notwithstanding these minor imperfections, Financial Behavior is a rich resource for professionals who are devoted to the financial well-being of wealthy individuals and recognize that understanding one’s clients consists of more than knowing their risk tolerances and return expectations.

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