Contributed by: Manish Chandak
CFA Society India, Pune hosted a 4-hour workshop on “Behavioral Finance for Wealth Managers” by Dr. Abhishek Sachan on 26th May 2018. Dr. Abhishek is a CFA Charter holder and has graduated with a PhD from Nirma University in Behavioral Finance. He is currently Finance faculty at School of BFSI, Symbiosis University of Applied Sciences, Indore.
He started the session by introducing Behavioral Finance and differentiating between Rational Investor and Real Investor. He pointed out that the theoretical Rational Economic Man (REM) does not exist. Behavioral Finance considers investors as real investors. Unlike Rational investors, Real investors have limited information, limited processing capacity and limited time to take decision and have bounded rationality.
He further explained following Emotional Biases and Cognitive Errors with various examples.
Emotional Biases: Emotions affect decisions directly and indirectly; an emotionally biased person gives subjective value to alternatives based upon illogical premises. The decisions of investment may not be based on informational and analytical inputs but on some emotional aspects. These biases stem from impulse, intuition and feelings.
These biases are difficult to correct, usually portfolio managers adapt to the clients which show presence of emotional biases.
- Loss Aversion
- Status Quo
- Regret Aversion
Cognitive Errors: Cognitive errors indicate towards limitations of individuals for basic information processing. Broadly, cognitive errors stem from inability to understand statistics, memory errors, improper reasoning, and underweighting/overweighting new information.
The good thing about them is that to an extent they can be corrected by educating clients.
- Cognitive Dissonance
- Ambiguity Aversion
- Mental Accounting
- Illusion of Control
- Anchoring & Adjustment
- Self-Attribution Bias
He also distributed handouts and discussed various case studies and provided fascinating insights. He suggested that wealth managers should go beyond risk profiling and conduct behavioral profiling based on biases, personality and demographics. He also shared interesting patterns of investors based on demographics and personality.
He suggested following books for those interested in Behavioral Finance:
- Behavioral Finance and Wealth Management – Michael M Pompian
- Beyond Greed and Fear – Hersh Shefrin
- Handbook of Behavioral Finance – Brian Bruce
- Misbehaving – Richard H Thaler
- Predictably Irrational – Dan Ariely
This is the first time Pune chapter of CFA Society India hosted 4-hour event. The response to the workshop was overwhelming. The workshop was attended by wealth managers, CFA Society members, CFA candidates and guests. In the end, Sampath Reddy (CIO, Bajaj Allianz Life Insurance) felicitated Dr. Abhishek Sachan. This was followed by networking and dinner.