Practitioners Should Alter Their Approach To Clients Based On A Simple Behavioral Finance Profiling System

Monday, February 24, 2014 16:45
edit
Practitioners Should Alter Their Approach To Clients Based On A Simple Behavioral Finance Profiling System

Are you altering your approach to investors based on the type of behavioral investor they are? Prof. Victor Ricciardi, who will be speaking about behavioral finance at this Friday's A4A webinar, says advisors should be doing just that.

This Website Is For Financial Professionals Only


I asked Ricciardi to send me a note about one aspect of what he will cover during his session on Friday, and he sent me a few sentences pointing out the difference between the two types of behavioral investors, "overconfident" versus "status quo" investors. 

 

Riccardi's suggestion that advisors alter their approach to investors based on their behavioral investing profile, shows how behavioral finance -- ivory tower research -- can be so very important in how a practitioner deals with different types of investors.

 

"Investment advisors should implement a balanced approach to find the correct middle ground in providing advice to these two groups of investors," says Ricciardi. 

 

The field of behavioral finance is of huge importance and is attracting a lot of attention in academia. But connecting it to how practitioners treat different clients brings the research down to a new practical level. It can help advisors communicate better with clients and behave more rationally. So I am pretty excited about bringing Ricciardi to the Advisors4Advisors webinar series. 

 

Ricciardi is a Finance Professor at Goucher College in Baltimore, Maryland and co-editor of the new book Investor Behavior: The Psychology of Financial Planning and Investing with Kent Baker.

 

In asserting that practitioner's should treat some clients one way and other clients another way based on the investor's behavioral investing profile,  Ricciardi cited a recent article he co-authored with Kent Baker entitled, “How Biases Affect Investor Behaviour,” which was published in The European Financial Review, and that included this description of the two types of behavioral investors:

   

Overconfident investors have a tendency to overestimate their skills and ability to make predictions. A 2001 study by Barber and Odean sampled 35,000 client accounts over a six-year investment horizon examined trading behavior based on the notion of gender bias. The findings suggest that males are more overconfident than females in terms of their investing abilities and males trade on a more frequent basis. An extensive number of research literature within behavioral finance reveals people have a tendency to be overconfident regarding their financial and investment decisions.
 
Status quo investors. This group of investors has an inclination to suffer from inertia, procrastination or inattention towards their financial judgments and decisions. In a study by Mitchell, Mottola, Utkus and Yamaguchi (2006) examines the trading behavior of employees invested in 401(k) plans. The study utilizes a sample of 1.2 million workers enrolled in 1,500 different retirement plans, a very strong majority of the 401(k) plan investors are categorized by “intense inactivity.” Nearly 80% of the retirement savers made no trades in their accounts over a two-year period.
 

 

 

 

Comments (0)

Write comment

You must be logged in to post a comment. Please register if you do not have an account yet.

busy