finance
Behavioural finance
Understanding how the mind can help or hinder investment success
By Alistair Byrne
With Stephen P Utkus
For investment professionals only – not for retail investors.
1
Why bother with behavioural finance?
This document aims to provide a practical introduction to general tenents of behavioural finance and highlights the potential lessons for successful investing. The behavioural biases discussed in this guide are ingrained aspects of human decision-making processes. Many of them have served us well as ways of coping with day-to-day choices. But, they may be unhelpful for achieving success in long-term activities such as investing. We are unlikely to find a ‘cure’ for the biases, but if we are aware of the biases and their effect, we can possibly avoid the major pitfalls.
Behavioural finance holds out the prospect of a better understanding of financial market behaviour and scope for investors to make better investment decisions based on an understanding of the potential pitfalls.
This guide focuses on the latter issue. Advisers can learn to understand their own biases and also act as a behavioural coach to clients in helping them deal with their own biases.
2
Alistair Byrne
Senior Investment Consultant at Towers Watson. He has particular expertise in pension fund investment and defined contribution pension schemes.
Alistair began his career in investment management at
AEGON Asset Management, where he was investment strategist and head of equity research. He then went on to Investit Ltd where he was responsible for advising asset management firms on development. He has also held academic positions at the
University of Edinburgh and
Strathclyde business schools and has run his own financial services consultancy business. Alistair earned a PhD in finance from the
University of Strathclyde and is a
CFA charterholder. His research has been published in a number of academic and
Understanding how the mind can help or hinder investment success
By Alistair Byrne
With Stephen P Utkus
For investment professionals only – not for retail investors.
1
Why bother with behavioural finance?
This document aims to provide a practical introduction to general tenents of behavioural finance and highlights the potential lessons for successful investing. The behavioural biases discussed in this guide are ingrained aspects of human decision-making processes. Many of them have served us well as ways of coping with day-to-day choices. But, they may be unhelpful for achieving success in long-term activities such as investing. We are unlikely to find a ‘cure’ for the biases, but if we are aware of the biases and their effect, we can possibly avoid the major pitfalls.
Behavioural finance holds out the prospect of a better understanding of financial market behaviour and scope for investors to make better investment decisions based on an understanding of the potential pitfalls.
This guide focuses on the latter issue. Advisers can learn to understand their own biases and also act as a behavioural coach to clients in helping them deal with their own biases.
2
Alistair Byrne
Senior Investment Consultant at Towers Watson. He has particular expertise in pension fund investment and defined contribution pension schemes.
Alistair began his career in investment management at
AEGON Asset Management, where he was investment strategist and head of equity research. He then went on to Investit Ltd where he was responsible for advising asset management firms on development. He has also held academic positions at the
University of Edinburgh and
Strathclyde business schools and has run his own financial services consultancy business. Alistair earned a PhD in finance from the
University of Strathclyde and is a
CFA charterholder. His research has been published in a number of academic and
Bibliography: Shefrin, Hersh, 2000.Beyond Greed and Fear: Finance and the Psychology of Investing. Thaler, Richard and Sunstein, Cass, 2008. Nudge: Improving Decisions about Health, Wealth and Zweig, Jason, 2007. Your money and your brain.