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You are to plot a savings investment plan to retirement reflecting your own situation, likely rates of return in your country or in the currency you expect to save it.
The principle here is that each of us should build a retirement nestegg over and above state, employee investment plan or private pensions, and in addition to any other sources of income like property or a business.
Behavioral Finance in Asset Management: A Primer
by Dr. Marcus Schulmerich, CFA, FRM Senior Product Engineer
With financial crises taking place more frequently and their impact spreading far and wide across the globe—the devastating 2007–2009 Great Recession and stock market crash being the latest example—the need to better understand and address the root causes of such crashes becomes ever more important.
While standard finance theory cannot explain the phenomenon, Behavioral Finance theory offers some compelling explanations. Behavioral Finance supplements standard finance theory by introducing behavioral and psychological criteria to help clarify investors’ decision-making process. This article outlines the background and key findings of Behavioral Finance and examines the influence of “behavioral biases” in stock market crashes.
An Introduction to Behavioral Finance
In 1956, Noble Prize Laureate Vernon Smith1 first introduced the concept of Behavioral Finance. At the time, the investment community did not believe in the idea that human behavior influences security prices. However, other people like the three psychologists—Amos Tversky,2 Paul Slovic3 and Daniel Kahneman4—continue to analyze investors’ so-called behavioral biases. They played a central role in the development of Behavioral Finance.
Slovic saw the relevance of behavioral concepts in finance and set out his thesis in two articles at the end of the 1960s.5 Then, in 1974, Tversky and Kahneman, introduced the fundamental concept of heuristics—the study of how people make decisions, rush to judgment or solve problems often based upon their past experiences and biases. Since then, academics and practitioners have incorporated heuristics into Behavioral Finance and led a vast research effort focusing on the cause and effect of psychological biases in financial markets.
More recently, in 2001, David Hirshleifer6 published a concise overview of the most important behavioral biases, as shown in Chart 1. The biases are grouped into four categories:
In each of the four columns key biases are highlighted in light blue. As examined below, these biases, in large part, help explain the occurrence of stock market bubbles and crashes…
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