Aspects of Investor Psychology

A paper argues that financial advising is a prescriptive activity whose main objective should be to guide investors to make decisions that best serve their interests. To advise effectively, advisors must be guided by an accurate picture of the cognitive and emotional weaknesses of investors that rel...

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Bibliographic Details
Published in:Journal of portfolio management 1998-07, Vol.24 (4), p.52-65
Main Authors: Kahneman, Daniel, Riepe, Mark W.
Format: Article
Language:English
Subjects:
Advisors
Bias
Calibration
Confidence intervals
Decision making
Financial planners
Guidelines
Investment advisors
Investment policy
Investments
Investors
Judgments
Optimism
Probability
Professionals
Psychological aspects
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Summary:A paper argues that financial advising is a prescriptive activity whose main objective should be to guide investors to make decisions that best serve their interests. To advise effectively, advisors must be guided by an accurate picture of the cognitive and emotional weaknesses of investors that relate to making investment decisions: their occasionally faulty assessment of their own interests and true wishes, the relevant facts that they tend to ignore, and the limits of their ability to accept advice and to live with the decisions they make. The paper sketches some parts of that picture as they have emerged from research on judgment, decision-making, and regret over the last 3 decades. The paper deals with a selection of judgment biases and with errors or preference, which arise either from mistakes that people make in assigning values to future outcomes, or from improper combinations of probabilities and values.
ISSN:0095-4918
2168-8656
DOI:10.3905/jpm.1998.409643