Promoting the wealth and well being of your clients managing risk regret fear and hope
Download
1 / 71

Promoting the wealth and well-being of your clients: Managing risk, regret, fear and hope - PowerPoint PPT Presentation


  • 107 Views
  • Uploaded on
  • Presentation posted in: General

Promoting the wealth and well-being of your clients: Managing risk, regret, fear and hope. Meir Statman Glenn Klimek Professor of Finance Santa Clara University http://lsb.scu.edu/finance/faculty/Statman/Default.htm. January 1997. The Story of Sharon and Russ Gornie Hopes and Fears.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha

Download Presentation

Promoting the wealth and well-being of your clients: Managing risk, regret, fear and hope

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Promoting the wealth and well being of your clients managing risk regret fear and hope
Promoting the wealth and well-being of your clients: Managing risk, regret, fear and hope

Meir StatmanGlenn Klimek Professor of Finance

Santa Clara University

http://lsb.scu.edu/finance/faculty/Statman/Default.htm


January 1997
January 1997 Managing risk, regret, fear and hope


The story of sharon and russ gornie hopes and fears
The Story of Sharon and Russ Gornie Managing risk, regret, fear and hopeHopes and Fears


Gornies clip here
Gornies Clip Here Managing risk, regret, fear and hope


Standard finance and behavioral finance
Standard Finance and Behavioral Finance Managing risk, regret, fear and hope

Standard Finance – Investors are rational.

Behavioral Finance – Investors are normal.


We are neither rational nor irrational we are normal
We are neither rational nor irrational Managing risk, regret, fear and hopeWe are normal

We know Sharon and Russ.

We know their hopes.

We know their fears.

We know their aspirations.

Can we help them?


Promoting the wealth and well being of your clients managing risk regret fear and hope

What do normal investors want? Managing risk, regret, fear and hope

It is about more than money.

It is about more than risk and returns.

It is about: hope

fear

winningstress

status

security

It is about: life


Financial physicians
Financial Physicians Managing risk, regret, fear and hope

Physicians promote more than health.

They promote health and well-being.

Financial advisors are financial physicians.

The promote wealth and well-being.

Financial advisors manage investments.

Financial advisors manage investors.


Financial physicians1
Financial Physicians Managing risk, regret, fear and hope

Ask, listen, empathize

Diagnose

Educate

Treat


First lesson to investors and advisors know yourself
First Lesson to investors and advisors Managing risk, regret, fear and hopeKnow Yourself

Make yourself your ally

Know your goalsKnow your emotionsKnow your cognitive biases


Second lesson to investors and advisors protect yourself
Second Lesson to investors and advisors Managing risk, regret, fear and hopeProtect Yourself

Make science your ally Know the science of financial markets.Know the science of human behavior.


Third lesson to investors protect yourself
Third Lesson to investors Managing risk, regret, fear and hopeProtect Yourself

Make your financial advisor your allyGood financial advisors are like good physicians.

They educate and sometimes they nudge.

Good financial advisors promote both wealth and well-being.

Third Lesson to advisors

Be a good financial physician


Cognitive biases and emotions rome airport
Cognitive Biases and Emotions Managing risk, regret, fear and hopeRome Airport


Cognitive biases and emotions rome hotel
Cognitive Biases and Emotions Managing risk, regret, fear and hopeRome Hotel


Cognitive biases and emotions rome hotel1
Cognitive Biases and Emotions Managing risk, regret, fear and hopeRome Hotel


Cognitive biases and emotions rome hotel2
Cognitive Biases and Emotions Managing risk, regret, fear and hopeRome Hotel


Cognitive biases and emotions
Cognitive Biases and Emotions Managing risk, regret, fear and hope

Cognitive biases

  • Framing

    • Size and color of Euro bills

    • Mental accounting (Where do the €80 belong?)

  • Hindsight

  • Emotions

    • Embarrassment

    • Anger

    • Regret


Cognitive biases and emotions how can we overcome hindsight how can we make peace with losses
Cognitive Biases and Emotions Managing risk, regret, fear and hopeHow can we overcome hindsight?How can we make peace with losses?

The pain and the phantom pain of regret.


Cognitive biases and emotions regret
Cognitive biases and emotions Managing risk, regret, fear and hopeRegret

Investors overcome the pain of regret by shifting responsibility.

I am not stupid.

My financial advisor is stupid.


Financial advisors are tempted to strike back
Financial advisors are tempted to strike back. Managing risk, regret, fear and hope

“If we’re being honest, it was your decision to follow my recommendation that cost you money.”


Cognitive biases and emotions1
Cognitive biases and emotions Managing risk, regret, fear and hope

Hindsight and regret

Google

Cikovsky took $4,000 cash.

Patterson took 16,000 stock options.

16,000 Google shares

@ $85/share = $1,360,000

@ $300/share = $4,800,000

@480/share = $7,680,000


Cognitive biases and emotions2
Cognitive biases and emotions Managing risk, regret, fear and hope

Hindsight and regret.

Why didn’t I get my $4,000 in Google options?


Promoting the wealth and well being of your clients managing risk regret fear and hope

Make science your ally Managing risk, regret, fear and hopeCombating cognitive biases and emotionsEducation (We are all subject to hindsight bias and regret) Cikovsky: Do I wish I’d had the shares? Yes…but what’s always in the back of my mind is an IPO is never guaranteed…and 9 out of 10 start-ups fail”


Promoting the wealth and well being of your clients managing risk regret fear and hope

Make science your ally Managing risk, regret, fear and hope

Evidence – Based Medicine

Theory, hypotheses, and empirical evidence

Wheat Bran Dietary Supplement Appears Not to Reduce Risk for Developing Pre-Cancerous Colorectal Polyps.

New England Journal of Medicine

(2000)


Make science your ally the science of human behavior
Make science your ally Managing risk, regret, fear and hopeThe science of human behavior

But why do we behave as we do?

Because we are intelligent

We search for patterns

We jump to conclusions

We are affected by emotions

We fall into pitfalls of cognitive biases


Evolutionary psychology darwinian psychology
Evolutionary Psychology Managing risk, regret, fear and hopeDarwinian Psychology

Why is intuition so appealing?

The scientific method as a check on intuition

A brain module for recognizing faces


Recognizing faces clip here
Recognizing faces clip here Managing risk, regret, fear and hope


Of rats and men who is more intelligent
Of Rats and Men. Managing risk, regret, fear and hopeWho is more intelligent?


Touch a button s or b

S Managing risk, regret, fear and hope

B

Intelligence - Searching for Patterns

Touch a button, S or B

You win (money or food) if the choice is right.


Promoting the wealth and well being of your clients managing risk regret fear and hope

B Managing risk, regret, fear and hope

S

Intelligence - Searching for Patterns

Touching Button S

1/5 chance of winning

Always

100%

Rats

4/5

80%

Men

4/5 chance of winning

60%

40%

Make science your ally

Are the patterns you see really there?

20%

Never

0%

1

2

3

4

5

Time


Portfolios and asset allocation

Portfolios and Asset Managing risk, regret, fear and hope

Allocation


Question
Question Managing risk, regret, fear and hope

If you could increase your chances of having a more comfortable retirement by taking more risk, would you:

  • Be wiling to take a little more risk with all your money?

  • Be willing to take a lot more risk with some of your money?


If you could increase you chances of improving your returns by taking more risk would you

A lot more risk Managing risk, regret, fear and hope

=

x

Some of your money

Addition to portfolio risk

=

x

All of your money

Addition to portfolio risk

A little more risk

Money

Risk

a.

If you could increase you chances of improving your returns by taking more risk, would you:

b.


Mean variance portfolio theory
Mean-variance portfolio theory Managing risk, regret, fear and hope

Investors care only about risk and

expected returns.

Investors are averse to risk.

Investors consider portfolios as a whole.


Promoting the wealth and well being of your clients managing risk regret fear and hope

Mean-Variance Portfolio Theory Managing risk, regret, fear and hope


Promoting the wealth and well being of your clients managing risk regret fear and hope

Investors are not always averse to risk Managing risk, regret, fear and hopeInvestors buy both insurance policies and lottery ticketsInvestors are motivated by goalsInvestors consider their portfolio as a pyramid of distinct layers, not as a whole

Behavioral Portfolio Theory


Promoting the wealth and well being of your clients managing risk regret fear and hope
Mean-Variance Portfolio Theory Managing risk, regret, fear and hopeIt all mixes in the stomachInvestors want highly nourishing and low cost meals.

Behavioral Portfolios Portfolios from the perspective of the palate as well as the perspective of the stomach. Investors want highly nourishing and low cost meals. But they also want palatable meals.


Behavioral portfolio theory

Satellite Managing risk, regret, fear and hope

Core

Behavioral portfolio theory

A LOT more risk with SOME of your money


Behavioral portfolio theory1

Satellite Managing risk, regret, fear and hope

Core

Behavioral Portfolio Theory

Downside protection vs. Upside potential?

Low risk vs. high risk? (Risk budget)Passive vs. active?Diversified vs. concentrated?


Promoting the wealth and well being of your clients managing risk regret fear and hope

Behavioral Portfolio Theory Managing risk, regret, fear and hope


Promoting the wealth and well being of your clients managing risk regret fear and hope

Charity Managing risk, regret, fear and hope

Travel

Children’sEducation

Retirement

Behavioral Portfolio Theory


Behavioral portfolio theory2

I have some chance of upside potential Managing risk, regret, fear and hope

(20% chance)

I’m virtually sure that my downside is protected

(Almost 100% chance)

Behavioral Portfolio Theory

Different probabilities for

different goals

Financial advisors should create portfolios that distinguish downside protection from upside potential and offer sure downside protection along with some upside potential.


Promoting the wealth and well being of your clients managing risk regret fear and hope

Behavioral Portfolio Theory Managing risk, regret, fear and hope

Focus on goals


Someone s going to win the lottery just not you it s time for e trade

Behavioral Portfolio Theory Managing risk, regret, fear and hope

Goals, hopes, fears and aspirations change over time

Late 1990s

Someone’s going to win the lottery.

Just not you.

It’s time for E*Trade


Promoting the wealth and well being of your clients managing risk regret fear and hope

Behavioral Portfolio Theory Managing risk, regret, fear and hope

Goals, hopes, fears and aspirations change over time

Early 2000s


Promoting the wealth and well being of your clients managing risk regret fear and hope

Behavioral Portfolio Theory Managing risk, regret, fear and hope

Goals, hopes, fears and aspirations change over time

Late 1990s

Early 2000s

Upside

Upside

Downside

Downside


Financial physicians2
Financial Physicians Managing risk, regret, fear and hope

Aspirations

Investors aspire to be rich. (Greed)

Investors aspire to be secure. (Fear)

Don’t let your investors fluctuate between greed and fear.

Don’t let your investors fluctuate between lottery tickets and money market funds

Financial Physicians promote wealth and well-being


Make science your ally
Make science your ally Managing risk, regret, fear and hope

Emotions affect attitudes toward risk

FearTake less risk


Damasio clip here
Damasio Clip Here Managing risk, regret, fear and hope


Make science your ally emotions affect attitudes towards risk
Make science your ally Managing risk, regret, fear and hopeEmotions affect attitudes towards risk

FearTake less risk

AngerTake more risk

OptimismTake more risk

PessimismTake less risk


Promoting the wealth and well being of your clients managing risk regret fear and hope

Third Lesson for investors Managing risk, regret, fear and hopeProtect yourself - Make your financial advisor your ally

Good financial advisors are like good physicians. The educate and sometimes nudge.

Good financial advisors promote both wealth and well-being.


Promoting the wealth and well being of your clients managing risk regret fear and hope
Wealth and Well-Being Managing risk, regret, fear and hopeThe Story of Jim Clark of Silicon Graphics, Netscape and Healtheon(A man with a billion dollars in 1999)


Promoting the wealth and well being of your clients managing risk regret fear and hope

“I just want to have more money than Larry Ellison. I don’t know why.”

Jim Clark of Silicon Graphics, Netscape and Healtheon in an interview with Michael Lewis, New York Times, October 10, 1999.


Larry ellison is rich larry ellison s expenses
Larry Ellison is rich don’t know why.”Larry Ellison’s expenses

1) Life Style -- annual $20m

2) Interest Accrual -- annual $75m

3) Villa in Japan -- $25m

4) New Yacht -- $194m -- over 3 yrs

5) America's Cup -- $80m -- over 3 yrs

6) UAD -- 12m over 3 yrs.


Larry ellison is rich does larry ellison enjoy well being
Larry Ellison is rich. don’t know why.”Does Larry Ellison enjoy well-being?


Promoting the wealth and well being of your clients managing risk regret fear and hope
Larry Ellison’s quest for the perfect yacht began four year ago after a girlfriend slighted his 80-foot sailboat Sayonara.

San Jose Mercury News

July 22, 2000



She made me feel terribly inadequate as a result i went on a search to reclaim my adequacy
“She made me feel terribly inadequate,” white luxury craft floating nearby.“As a result, I went on a search to reclaim my adequacy.”


Promoting the wealth and well being of your clients managing risk regret fear and hope

Wealth and Well-Being white luxury craft floating nearby.

Larry Ellison got married


Well being is high when
Well-being is high when: white luxury craft floating nearby.

  • Our positions are high relative to the positions of other people.

  • Our positions are high relative to our own past positions.

  • Our positions are high relative to our aspired positions.


Promoting the wealth and well being of your clients managing risk regret fear and hope

Why are the Danes so happy? white luxury craft floating nearby.On the whole are you very satisfied, fairly satisfied, not very satisfied or not at all satisfied with the life you lead?

Denmark

Very Satisfied

Fairly Satisfied

Not very Satisfied

Not at all Satisfied

Don’t Know

EU


Life satisfaction happiness scale
Life Satisfaction (Happiness) scale white luxury craft floating nearby.

Why are Danes so happy?

Danes have low expectations from life

Danes’ life exceeds expectations

“And in 1992 the Danes won the European Championship in soccer, creating ‘such a state of euphoria that the country has not been the same since.”

NYT, January 1, 2007


Conclusion
Conclusion white luxury craft floating nearby.


Promoting the wealth and well being of your clients managing risk regret fear and hope

First Lesson white luxury craft floating nearby.Know yourself - Make yourself your ally.Second LessonProtect yourself - Make science your ally.Third LessonProtect yourself -Make your financial advisor your ally.


Promoting the wealth and well being of your clients managing risk regret fear and hope
Life Satisfaction of Advisors white luxury craft floating nearby.Email from Larry Ellison’s AdvisorReduce the concentration of Oracle in your portfolio.

  • "I know this e-mail may/will depress you.

  • However, I believe it's my job to address issues you'd prefer not to confront.

  • You told me years ago that it's OK to raise the 'diversification issue' with you quarterly. ...

  • Well, I'm doing so.

  • View this as a call to arms."


ad
  • Login