Behavioral finance scholars often express skepticism about their own and others’ ability to avoid cognitive errors. Indeed, Daniel Kahneman, who, along with Amos Tversky, identified most of the cognitive errors we know, said that despite his decades of studying decision-making, he still committed the same cognitive errors as everyone else. “Knowing is not avoiding,” he […]
Can We Learn to Avoid Cognitive Errors? Read More »
“Don’t gamble,” Will Rogers said. “Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”1 The Psychology Behind Hindsight Bias The psychologist Baruch Fischhoff, who introduced us to hindsight shortcuts and errors, wrote, “In hindsight, people consistently exaggerate
Would You Drive Looking Through the Rear-View Mirror? Read More »
Confirmation errors mislead the proverbial dog that believes his bark makes UPS trucks go away. The dog can test his belief by seeking disconfirming evidence. How about not barking next time the UPS truck is in the driveway? If the truck stays in the driveway, that would be confirming evidence; however, if the truck leaves,
Irrational or Motivated? A Fresh Look at Confirmation Bias Read More »
An elderly couple moving to an assisted living apartment calls their son in another state for help moving their belongings. A widow in her 90s finds it difficult to clean her home, yet refuses to hire help. These people are not wealthy, but neither are they poor. Each has more than enough to pay a
Don’t Leave the Best for Last: Moving from Accumulation to Decumulation Read More »
Consider your answer to the following question: “Suppose you are given an opportunity to replace your current investment portfolio with a new portfolio. The new portfolio has a 50-50 chance to increase by 50% your standard of living during your lifetime. However, the new portfolio also has a 50-50 chance to decrease your standard of
Investment Risk, Investor Risk Tolerance and Behavioral Goals-Based Portfolios Read More »
International Stocks vs. U.S. Stocks International stocks have not done well recently compared with U.S. stocks. The 2024 return of international stocks (as measured by the MSCI World ex USA Index) was just under 5%, lagging by nearly 20 percentage points the return of U.S. stocks (as measured by the MSCI USA Index). And the
International Stocks and Recency Bias Read More »
Culture in the U.S. is described as individualistic, whereas it is described as collectivistic in China. Psychologist Geert Hofstede defines individualism as “a preference for a loosely-knit social framework in which individuals are expected to take care of only themselves and their immediate families.” He defines collectivism, its opposite, as “a preference for a tightly-knit
Filial Loyalty: What Adult Children Do for Their Elderly Parents Read More »
Think about your answer to the following question: “Please imagine a ladder, with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you, and the bottom of the ladder represents the worst possible life for you. On which step of the
Understanding the Three Dimensions of Life Well-Being & How Income Affects Them Read More »
Many years ago, a financial adviser told me about a couple, prospective clients, who said, “Before you start planning for us, you should know that we have a disabled son. We need to plan for him first so he is supported even when we’re gone.” I often note that the biggest risks in life are
Unlocking Life Well-Being: Insights from the Third Generation of Behavioral Finance Read More »
At the end of 2022, “The Magnificent Seven” was no more than the title of a 1960 American Western starring Yul Brynner and Steve McQueen. By the end of 2023, however, the “Magnificent Seven” turned into the name of a group of seven stocks that contributed more than two-thirds of the S&P 500® Index’s return
Diversification vs. Concentration in the Era of the ‘Magnificent Seven’ Read More »