Behavioral Finance for Private Banking
Description
An essential framework for wealth management using behavioral finance
Behavioral Finance for Private Banking provides a complete framework for wealth management tailored to the unique needs of each client. Merging behavioral finance with private banking, this framework helps you gain a greater understanding of your client’s wants, needs, and perspectives to streamline the decision making process. Beginning with the theoretical foundations of investment decision making and behavioral biases, the discussion delves into cultural differences in global business and asset allocation over the life cycle of the investment to help you construct a wealth management strategy catered to each individual’s needs. This new second edition has been updated to include coverage of fintech and neurofinance, an extension of behavioral finance that is beginning to gain traction in the private banking space.
Working closely with clients entails deep interpersonal give and take. To be successful, private banking professionals must be as well-versed in behavioral psychology as they are in finance; this intersection is the heart of behavioral finance, and this book provides essential knowledge that can help you better serve your clients’ needs.
- Understand the internal dialogue at work when investment decisions are made
- Overcome the most common behavioral biases—and watch for your own
- Learn how fintech and neurofinance impact all aspects of private banking
- Set up a structured wealth management process that places the client’s needs front and center
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
Chapter 11 Structured Wealth Management Process 169
11.1 Benefits 172
11.2 Implementation 173
11.3 Regulatory Requirements 174
11.4 Structuring the Wealth Management Process 177
11.5 Relevance of Different Theories 196
11.6 Complying with the Regulatory Requirements 197
11.7 Information Technology in Client Advisory Services 197
Chapter 12 Fintech 201
12.1 History of Fintech 201
12.2 Current State of Fintech 201
12.3 Assessment of Fintech Solutions 202
Chapter 13 Case Studies 203
13.1 Case Study 1: Structured Wealth Management 204
13.2 Case Study 2: Experience Sampling 209
13.3 Case Study 3: Goal-based Approach 210
Chapter 14 Conclusions 219
Chapter 15 Appendix: Mathematical Arguments 221
15.1 Proof that Expected Utility Satisfies the Axioms of Rational Choice 221
15.2 Derivation of the Fourfold Pattern of Risk Taking 222
15.3 Mean-Variance as a Special Case of Prospect Theory 222
15.4 Prospect Theory Optimal Asset Allocation 224
15.5 No Time Diversification Theorem 225
References 227
Index 235
KREMENA BACHMANN is senior research associate at the University of Zurich, senior lecturer at the Zurich University of Applied Sciences (ZHAW) and academic advisor at Moor & Bachmann AG, a Swiss multi-family office. As a behavioral finance researcher publishing in peer-reviewed journals she is also actively engaged in the development of practical solutions that help to improve financial decision making.
ENRICO DE GIORGI is professor of mathematics and director of the institute of mathematics and statistics at University of St. Gallen. He is also associate editor of Mathematics and Financial Economics and Decisions in Economics and Finance and founding partner of BhFS Behavioral Finance Solutions. His research has been published in the top peer-reviewed journals in Finance and Management.
THORSTEN HENS is a professor of financial economics and a member of the directorate of the department of banking and finance at the University of Zurich. He is a founding partner of BhFS Behavioral Finance Solutions, Swiss Fintech Innovations and the University of Zurich Research Priority Program on financial regulation, Finreg. He is a coauthor of 60 peer-reviewed scientific publications and seven books.
Sound investment theory doesn't always translate well into private financial advising because clients come with a diverse mix of emotional, cultural, and biological biases. After all, they are human. As financial advisors, it's often difficult to custom fit investment strategies to the personal traits of private investors. Behavioral Finance for Private Banking offers a prescriptive framework to personalize investment decisions with insights from behavioral psychology.
From assessing a client's behavioral biases to building an optimal portfolio and successfully managing it over time, this practical guide serves as a deep resource of up-to-date information and robust tools for the everyday advisor. In addition to fresh insights and the latest best practices from the original authors, fellow thought leader at BhFS, Enrico De Giorgi joins this Second Edition to offer greater depth of coverage into the mathematics behind the strategic solutions inside.
In addition to illuminating the useful research and theories behind behavioral finance, this comprehensive reference for the real world also debunks the most common myths about investor behavior and offers concrete approaches to handling each type of investor personality. New advisors and experienced ones, alike, can add a valuable layer to their skillsets by mastering how to:
- Expertly align asset allocation and investment products to client risk profiles and perspectives
- Understand which clients will rebalance, take profits, or increase risk during the lifecycle of their portfolios
- Apply the latest findings in behavioral finance to enhance your wealth management process
Grow wealth in a way personally advantageous to each client with Behavioral Finance for Private Banking, Second Edition.
Praise for Behavioral Finance for Private Banking
"This book provides investment professionals with skills they need to help investors craft sensible portfolios that are suitable for the financial world as it is. The world we face is one in which investors have psychological needs that go beyond mean-variance efficiency, systematic biases that interfere with perfect rationality, and financial markets which do not efficiently impound information into prices. Readers of this book will come away with a set of tools that provide them with a competitive advantage when it comes to providing clients with realistic advice that is tailored to their situations." —Hersh Shefrin, Mario L. Belotti Professor of Finance, Santa Clara University
"This book provides a long-needed connection between decision theory and finance theory while—and this is its strongest point—connecting with applications throughout. Its main novelty is the use of recent behavioural insights, where the authors are best equipped for this task because they are leading experts. It leads to much more realistic understandings of investors, inefficient markets without arbitrage corrections, optimal financial advices in private banking, and so on, bringing scientific insights into what could only be an art in the past. This book is a must for everyone interested in the practical relevance of modern finance." —Peter Wakker, Professor of Decisions Under Uncertainty, Econometric Institute of Erasmus School of Economics (ESE), Rotterdam
"The ongoing fintech revolution is one of the major challenges of private banking. To master it, a thorough understanding of investor behavior is necessary. Behavioral Finance for Private Banking shows how scientific methods support practitioners in mastering the challenges of the next decade integrated in a convincingly smart advice process." —Marianne Wildi, CEO, Hypothekarbank Lenzburg
"Exciting times beckon us as we now stand at the crossroads of multiple paradigm shifts. Take Tesla's self-driving car, which spurred the public's enthusiasm while the regulators acknowledge the need for a paradigm shift in traffic policies. The book Behavioral Finance for Private Banking is the Tesla of the Private Banking world. For decades, the industry grapples with the 'gut feel' to advise, using fear and greed to instigate regrettable decisions. The discipline offers predictive power to transform the entire wealth industry. In this new world, the financial auto-pilot is personalized to give the client a safe, enjoyable and cost-efficient ride." —Michael Gerber, CEO, 360F (Singapore) Pte Ltd
PUBLISHER:
Wiley
ISBN-13:
9781119453703
BINDING:
Hardback
BISAC:
BUSINESS & ECONOMICS
BOOK DIMENSIONS:
Dimensions: 157.50(W) x Dimensions: 231.10(H) x Dimensions: 27.90(D)
AUDIENCE TYPE:
General/Adult
LANGUAGE:
English