Risk Tolerance and Behavioral Finance

FEATURE | Risk Tolerance and Behavioral Finance

By Michael M. Pompian, CFA®, CAIA®, CFP®

e have seen a powerful recovery Figure 1: Type of Bias and Level of Wealth in asset prices in the wake of the W global financial crisis (GFC). We cannot forget, however, that more than High Level of Wealth (ADAPT) $15 trillion in asset values evaporated in 2008–2009, wiping out gains earned in the bull markets of the 1990s and early 2000s. Moderate and Adapt During the GFC, clients were horrified Adapt and did not know what to do. Of course, in hindsight, the right thing to do was to ride Cognitive Biases Emotional Biases (MODERATE) out the storm; some investors sold out and (ADAPT) Moderate and regret it to this day. History has shown that Moderate Adapt markets are cyclical, so another bear market will occur again, it is just a matter of time. When times are good, as they have been for Low Level of Wealth the past eight years, our skills as advisors (MODERATE) can get dull because we haven’t had to deal with panicky, stressed-out clients. But we need to stay on top of our game. Knowing biases lead to reasoning influenced by feel- representativeness, illusion of control, and that markets can grow suddenly violent, ings. This distinction is critical. hindsight. financial advisors must be able to diagnose irrational behaviors and advise their clients Cognitive biases can be broken down into Information-processing biases affect people accordingly. That means incorporating belief-perseverance and information- who make thinking errors when processing behavioral finance into our practices. processing biases. Belief-perseverance information. The simplest example is biases affect people who have a hard time anchoring, where people tend to estimate Behavioral Finance modifying their beliefs even when faced something based on an initial default num- The way investors think and feel affects with information to the contrary. It is a ber. If I asked you to estimate the popula- their investment behaviors. Some investor very human reaction to feel uncomfortable tion of Canada and remarked that I did not behaviors are unconsciously influenced by when new information contradicts infor- know whether it was higher or lower than past experiences and personal beliefs to the mation you hold to be true. For example, 30 million, you would probably “anchor” extent that even intelligent investors may for decades many people have been under your estimate to that number and adjust deviate from logic and reason. These influ- the false impression that eating sugar pro- from there rather than make an indepen- ences, or behavioral biases, can affect the duces hyperactivity in children. Twenty dent estimate. Information-processing way risk is perceived. In Pompian (2006), years ago, several studies examined the biases include anchoring and adjustment, I introduced a way to categorize biases. effects of sugar on children’s behavior and mental accounting, framing, availability, The broadest category is cognitive and concluded that sugar in the diet does not self-attribution, outcome, and recency. emotional. Cognitive biases involve how affect children’s behavior (Wolraich et al. people think and emotional biases involve 1995). But many people continue to believe Emotional biases are based on feelings how people feel. Cognitive errors result that it does; this is an example of belief per- rather than facts. Emotions can overpower from memory and information-processing severance. Related biases include cognitive our thinking during times of stress. All of errors—that is, faulty reasoning. Emotional dissonance, conservatism, confirmation, us likely have made irrational decisions

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during our lives. Emotional biases include appetite varies per expected return; it are also unknown unknowns. There are loss aversion, overconfidence, self-control, may be expressed qualitatively and/or things we don’t know we don’t know.”1 status quo, endowment, regret aversion, quantitatively. Investors with a high risk and affinity. appetite focus on the potential for signifi- Clients may tell advisors that they have cer- cant gains and are willing to accept a tain risk appetites and risk capacities. But The distinction between cognitive and higher possibility or severity of loss. do the advisor and the client agree on what emotional biases is critical when assessing Conversely, investors with a low risk appe- is meant by risk? How much known risk risk tolerance. Advisors often need to adapt tite are risk-averse and focus on stability and how much unknown risk can the client to client behaviors caused by emotional and preservation of capital. handle? Known risk is what we might call biases because it is hard to change the way “normal risk”—risk we can comprehend people feel. With cognitive biases, however, The level of both risk appetite and risk easily and quantify using historical data advisors have an opportunity to modify or capacity varies by individual; obviously, from observations of financial markets. But change clients’ thinking and moderate investors should not define their risk appe- what about unknown “abnormal” risk, the clients’ behaviors. tite without considering their risk capacity, kind that occurs once every 10 or 20 years but sometimes they do. In the end, risk and falls outside expectations? We can Figure 1 shows a simple framework for capacity is the amount of risk a person can think of normal risk as one or two standard applying behavioral finance in practice that actually bear. On the one hand, an investor deviations from the normal. We can think I have used in my advisory practice over may have a high risk appetite but lack the of unknown risk as three or more standard the past 20 years to solve vexing challenges capacity to handle the potential volatility or deviations from the normal. Although of client relationship management. impact. Or risk capacity may be high but severe bear markets and crashes occur from the investor may have a lower risk appetite. time to time, 2008–2009 can be categorized Defining Risk Advisors can get a handle on these issues as an unknown or abnormal risk. At that There are lots of aspects to risk. Risk appe- with their clients relatively easily for known time, portfolio return fell outside the tite generally is the willingness to take risk, risks. Unknown risk, which is not so easily expected range of most models based on a and risk capacity is the ability to take risk. measured, is often associated with irratio- normal distribution of returns. We further define risk appetite and risk nal investor behavior. capacity in terms of known and unknown When a decision is made about how much risks, because when clients can understand Known and Unknown Risk risk to take (risk appetite) or a measurement and measure the risks they are taking, they Donald Rumsfeld, U.S. secretary of defense is taken of how much loss can be tolerated can accept the results. But problems arise under President George W. Bush, famously without jeopardizing financial goals (risk when the risks fall outside the bounds of described known and unknown risk: capacity), unknown risk can cause investors what they expect or understand. “There are known knowns. These are things to behave irrationally. People must consider we know that we know. There are known their likely reaction to known risk and espe- Risk appetite is the amount of risk that one unknowns. That is to say, there are things cially unknown risk to get a complete is willing to take in pursuit of reward. Risk that we know we do not know. But there picture of their risk tolerance. Figure 2 combines these concepts to graphically Figure 2: Equation for Risk Tolerance represent an equation for risk tolerance.

Risk Tolerance and Known Risks Behavioral Finance Risk Appetite Consider the concept of behavioral investor Unknown Risks types (BITs). BITs can be identified using my Behavioral Alpha® (BA) process. BA is a RISK multi-step diagnostic process that classifies TOLERANCE + = clients as one of four investor types. Bias identification, which is done near the end Known Risks of the process, is based on the client’s risk Risk Capacity tolerance. Unknown Risks

BITs were designed to help advisors make rapid yet insightful assessments before rec- Potential for behavioral problems in the investing process ommending an investment plan. By ascer- taining investor type at the outset of a

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relationship, an advisor can mitigate will affect family members, legacy, and Conservative Biases client behavioral surprises that might standard of living. Loss Aversion Bias dispose a client to change the portfolio Bias type: Emotional because of market turmoil. If an advisor Clients who are emotional about their can limit traumatic episodes by delivering investing need to be advised differently CIs tend to feel the pain of losses more smoother (or closer-to-expected) invest- from those who make mainly cognitive than the pleasure of gains compared with ment results by tailoring an investment errors. When advising emotionally driven other client types. Thus, these clients may plan to the client’s behavioral makeup, investors, advisors need to focus on how an hold losing investments too long, even a stronger client relationship is the result. investment program can affect important when they see no prospect of a turn- Here each BIT is characterized by a certain emotional issues such as financial security, around. Loss aversion is a very common risk tolerance level and a primary type retirement, and the impact on future gener- bias and is seen by large numbers of finan- of bias—either cognitive (driven by faulty ations—rather than focusing on portfolio cial advisors. reasoning) or emotional (driven by details such as standard deviations and impulses and/or feelings). Sharpe ratios. A quantitative approach is Status Quo Bias more effective with clients who are less Bias type: Emotional Advisors should keep in mind that the least emotional and tend to make cognitive risk-tolerant investors and the most risk- errors. The goal is to build better long-term CIs often like to keep their investments tolerant investors are driven by emotional relationships with clients, and BITs were (and other parts of their lives, for that mat- biases, whereas the two types between these designed to help in this effort. The four ter) the same—that is, they maintain the extremes are driven by cognitive biases BITs are conservative, moderate, growth, status quo. These investors tell themselves (Pompian 2012). Emotional clients, how- and aggressive; brief descriptions of the that “things have always been this way” and ever, tend to be more difficult to work with. types, their common biases, and thoughts thus feel safe keeping things the same. Advisors who can recognize the type of about how to advise each type of client are client they are dealing with before making included. Endowment Bias investment recommendations will be much Bias type: Emotional better prepared to deal with irrational Conservative Investors behavior when it arises. Risk tolerance level: Low CIs, especially those who inherit wealth, Behavioral bias orientation: Emotional tend to assign a greater value to an invest- Guidelines for Practitioners ment they already own (such as a piece of As discussed, the least risk-tolerant BIT description: Conservative Investors real estate or an inherited stock position) BIT clients and the most risk-tolerant (CIs) place great emphasis on financial than to one they neither possess nor have BIT clients are emotionally biased in security and preserving wealth. Many have the potential to acquire. their behavior. In the middle of the risk gained wealth through inheritance or by scale are BITs that are affected mainly by not risking their capital to build wealth Anchoring Bias cognitive biases. This dynamic should (e.g., by working in a large company). Bias type: Cognitive/Emotional make intuitive sense. Emotion drives the Because they tend to be risk-averse, CIs behavior of clients who have a high need may be worriers; they obsess over short- CIs often are influenced by purchase points for security (i.e., a low risk tolerance); term performance and are slow to make or arbitrary price levels and tend to cling to they get emotional about losing money investment decisions because they are such numbers when facing questions like, and are uneasy during times of stress or uncomfortable with change and uncer- “Should I buy or sell this investment?” change. Similarly, highly aggressive inves- tainty. This behavior is consistent with their Suppose that the stock falls to $75 a share tors are also emotionally driven people approach to their professional lives—they from a high of $100 five months ago. who typically suffer from a high level of are careful not to take excessive risks. Many Frequently, a conservative client will resist overconfidence and mistakenly believe CIs focus on taking care of family members selling until the price rebounds to at least they can control the outcomes of their and future generations, especially by fund- $100/share. investments. Between these extremes are ing life-enhancing experiences such as edu- the investors who suffer mainly from cation and homeownership. Mental Accounting Bias cognitive biases, and education and Bias type: Emotional/Cognitive information about their biases can help The biases of CIs tend to be emotional— them make better investment decisions. loss aversion, status quo, and endowment Conservative clients often treat various With aggressive clients, the best approach bias—but CIs also exhibit anchoring and sums of money differently on the basis of is to deal with their biases head-on and mental accounting, both of which also have where the sums are mentally categorized. discuss how their investment decisions cognitive aspects. For example, these investors segregate their

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assets into safe and risky “buckets.” balances. MIs generally comply with pro- the context in which a choice is presented Although this behavior is usually not fessional advice when they get it, but they (framed). The use of risk tolerance ques- harmful, returns almost certainly will be can sometimes be difficult because they do tionnaires provides a good example. suboptimal if all the assets are viewed as not enjoy, or they have no aptitude for, the Depending on how questions are asked, safe money. investment process. framing bias can cause investors to respond to risk tolerance questions in either an Advice for Conservative Investors: CIs The behavioral biases of MIs are mostly unduly risk-averse or an unduly risk-taking can be difficult to advise because they are cognitive: recency, hindsight, framing, manner. For instance, when questions are driven mainly by emotion. They greatly cognitive dissonance, and regret aversion. worded in the “gain frame” (e.g., suppose need good financial advice, and advisors an investment goes up), a risk-taking need to take time to interpret the behav- Moderate Biases response is more likely. When questions are ioral signs provided by CI clients. CIs need Recency Bias worded in the “loss frame” (e.g., suppose an big-picture advice, so advisors should not Bias type: Cognitive investment goes down), risk-averse behav- dwell on details such as standard deviations ior is the likely response. and Sharpe ratios lest they lose the client’s Recency bias is a predisposition to recall attention. CIs need to understand how their and emphasize recent events and/or obser- Cognitive Dissonance Bias portfolios will deliver desired results con- vations and to extrapolate patterns where Bias type: Cognitive cerning such emotional issues as family none exist. Recency bias ran rampant members and future generations. Once during the bull market of 2003–2007, In psychology, cognitions represent atti- they feel comfortable discussing these when many investors wrongly presumed tudes, emotions, beliefs, or values. When important emotional issues and trust is that the stock market—particularly energy, multiple cognitions intersect—for example, established, they will act. After a while, CIs housing, and international stocks—would a person believes something is true only to are likely to become an advisor’s best clients continue to gain indefinitely. A similar men- find out it is not—people try to alleviate because they value the advisor’s profession- tality is emerging now that the more recent their discomfort by ignoring the truth and/ alism, expertise, and objectivity in helping bull market of 2009–2017 has become or rationalizing their decisions. Investors them make the right investment decisions. entrenched in some investors’ minds. MIs who suffer from this bias may continue to In addition, CIs usually can benefit from may invest when prices are peaking, materi- invest in a security or fund they already the added risk that a competent advisor ally hurting long-term returns. own after it has gone down (i.e., they persuades them to take—so long as the double down), even when they know they advisor carefully monitors the risk and Hindsight Bias should be judging the new purchase objec- does not allow it to become too large. Bias type: Cognitive tively and independently of the existing holding. A common phrase for this concept Moderate Investors Moderate clients may be susceptible to is “throwing good money after bad.” Risk tolerance level: Moderate hindsight bias, which occurs when an Behavioral bias orientation: Cognitive investor perceives past investment out- Regret Aversion Bias comes as if they had been predictable. An Bias type: Emotional BIT description: Moderate Investors (MIs) example of hindsight bias is the response often do not have their own ideas about by investors to the financial crisis of 2008. MIs often avoid taking decisive actions investing but instead follow the lead of Initially, many viewed the housing market’s because they fear that, in hindsight, what- their friends and colleagues in making performance from 2003 to 2007 as normal ever course they select will prove unwise. investment decisions. They are comfortable (i.e., not symptomatic of a bubble), only Regret aversion can cause MIs to be too with being invested in the latest, most pop- later saying, “Wasn’t it obvious?” when the timid in their investment choices because ular investments, often without regard to a market had a meltdown in 2008. Hindsight of losses they have suffered in the past. long-term plan. One of the key challenges bias gives investors a false sense of security of working with MIs is that they often over- when making investment decisions, Advice for Moderate Investors: Clients estimate their risk tolerance. Advisors need emboldening them to take excessive risk with the biases of MIs need to recognize to be careful not to suggest too many “hot” without recognizing it as such. that they tend to follow the lead of others investment ideas—MIs likely will want to and may not have their own ideas about do all of them. Some dislike, or even fear, Framing Bias investing. They may not fully grasp their the task of investing, and many put off Bias type: Cognitive own risk tolerance but simply plow ahead making investment decisions unless they with the task of investing. When an invest- have professional advice; the result is that Framing bias is the tendency of investors to ment goes their way, they may convince they maintain, often by default, high cash respond to situations differently based on themselves that they “knew it all along,” a

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view that also increases future risk-taking Growth Biases with scant earnings or assets drops behavior. Advisors need to handle MIs with Conservatism Bias 25 percent after a negative product care because they are likely to say yes to Bias type: Cognitive announcement. Some GIs might take this investment ideas that make sense to them situation to be representative of a “value” regardless of whether the advice is in their Conservatism bias occurs when people stock because the stock is cheap. But bio- best long-term interest. Advisors need to cling to a prior view or forecast at the tech stocks do not typically have earnings, lead MIs to take a hard look at behavioral expense of acknowledging new informa- whereas traditional value stocks have had tendencies that may cause them to overesti- tion. GIs often exhibit this behavior. For earnings in the past but are temporarily mate their risk tolerance. Because MI biases example, assume that an investor purchases underperforming. are mainly cognitive, educating MI clients a security based on knowledge about a on the benefits of portfolio diversification forthcoming new-product announcement. Self-Attribution (Self-Enhancing) Bias and sticking to a long-term plan is usually The company then announces that it is Bias type: Cognitive the best course of action. Advisors should experiencing problems bringing the prod- challenge MI clients to be introspective and uct to market. GIs may cling to the initial, Self-attribution bias (or self-enhancing should provide data-backed substantiation optimistic impression of the new-product bias) refers to the tendency of people to for their recommendations. Offering infor- announcement and fail to act on the nega- ascribe their successes to their own innate mation to MI clients in clear, unambiguous tive announcement. talents and to blame failures on outside ways so they have the chance to “get it” is a influences. For example, suppose that a good idea. If advisors take the time, this Availability Bias GI invests in a particular stock that goes up steady, educational approach will generate Bias type: Cognitive in price. The investor believes it went up client loyalty and adherence to long-term because of the GI’s investment savvy rather investment plans. Availability bias occurs when people esti- than external factors such as economic mate the probability of an outcome based conditions or competitor failures (the most Growth Investors on how prevalent that outcome appears to likely reasons for the price rise). This Risk tolerance: Medium to high be in their lives. People who exhibit this behavior is classic self-enhancing bias. Behavioral bias orientation: Cognitive bias perceive easily recalled possibilities as more likely than prospects that are harder Confirmation Bias BIT description: Growth Investors (GIs) are to imagine or difficult to comprehend. For Bias type: Cognitive active investors with medium to high risk example, suppose that GIs are asked to tolerance; some are strong-willed and inde- identify the “best” mutual funds. Many of Confirmation bias occurs when people pendent thinkers. GIs are often self-assured them would perform a Google search and, observe, overvalue, or actively seek infor- and “trust their gut” when making deci- most likely, find funds from firms that mation that confirms their claims while sions; when they do their own research, engage in heavy advertising. Investors sub- ignoring or devaluing evidence that dis- however, they may not be thorough enough ject to availability bias are thus influenced counts their claims. Confirmation bias can with due diligence tasks. GIs sometimes to pick funds from such companies, even cause investors to seek only information make investments without consulting any- though some of the best-performing funds that confirms their beliefs about an invest- one. This behavior can be problematic advertise very little, if at all (they do not ment and not to seek information that con- because, owing to their independent mind- need to). tradicts their beliefs. This behavior can sets, these clients maintain their views even leave investors in the dark regarding, for when those views are no longer supportable Representativeness Bias example, the imminent decline of a stock. (e.g., because of changed market condi- Bias type: Cognitive GIs are often subject to this bias. tions). GIs often enjoy investing and are comfortable taking risks, but they may Representativeness bias occurs because of a Advice for Growth Investors: GIs can be resist following a financial plan. Of all the flawed perceptual framework when pro- difficult clients to advise owing to their behavioral investor types, GIs are the most cessing new information. To make new independent mindsets, but they usually are likely to be contrarian, which sometimes information easier to process, some inves- grounded enough to listen to sound advice can benefit them. Some GIs are obsessed tors project outcomes that resonate with when it is presented in a way that respects with trying to beat the market and may their own pre-existing ideas. For example, a their independent views. As we have hold concentrated portfolios. GI might view a particular stock as a value learned, GIs firmly believe in themselves stock because it resembles an earlier value and their decisions but can be blind to con- The behavioral biases of GIs are cognitive: stock that was a successful investment, but trary thinking. As with MIs, education is conservatism, availability, representative- the new investment is not a value stock. essential to changing the behavior of GIs, ness, self-attribution, and confirmation. Suppose that a high-flying biotech stock whose biases are predominantly cognitive.

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A good approach includes regular educa- emotional elements. Overconfidence mani- Illusion of Control Bias tional discussions during client meetings, fests itself in investors’ overestimation of Bias type: Cognitive in which the advisor does not point out the quality of their judgment. Many AIs unique or recent failures but, rather, edu- claim an above-average aptitude for select- The illusion of control bias occurs when cates clients and incorporates concepts that ing stocks; however, numerous studies have people believe that they can control or at are appropriate for them. Because GI biases shown this claim to be almost always a fal- least influence investment outcomes when, are mainly cognitive, educating GIs on the lacy. For example, a study done by in fact, they cannot. AIs who are subject to benefits of portfolio diversification and researchers Barber and Odean (2000) this bias believe that the best way to man- sticking to a long-term plan is usually the showed that after trading costs (but before age an investment portfolio is to constantly best course of action. Advisors should chal- taxes), the average investor underper- adjust it. For example, trading-oriented lenge GIs to reflect on how they make formed the market by approximately investors, who accept high levels of risk, investment decisions and should provide 2 percent a year owing to the investor’s believe that they possess more control over data-backed substantiation for their recom- unwarranted belief in his ability to assess the outcomes of their investments than mendations. Offering information in clear, the correct value of investment securities. they actually do because they are “pulling unambiguous ways is an effective approach. the trigger” on each decision. If advisors take the time, this steady, educa- Self-Control Bias tional method should yield positive results. Bias type: Emotional Advice for Aggressive Investors: AIs are the most difficult clients to advise, particu- Aggressive Investors Self-control bias is the tendency to con- larly if they have experienced losses. Risk tolerance: High sume today at the expense of saving for Because they like to control, or at least get Behavioral bias orientation: Emotional tomorrow. The primary concern for advi- deeply involved in, the details of investment sors is a client with high risk tolerance cou- decision-making, they tend to eschew BIT description: Aggressive Investors (AIs) pled with high spending. For example, advice that might keep their risk tolerance are the most aggressive BIT. These entre- suppose that you have an aggressive client in check. They are excited and optimistic preneurial clients are often the first genera- who prefers aggressive investments and has that their investments will do well, even if tion in their family to create wealth. They high current spending needs—and sud- that optimism is irrational. Some AIs need are even more strong willed and confident denly the financial markets hit severe tur- to be monitored for excessive spending, than GIs. Very wealthy AIs often have been bulence. To meet current expenses, the which, if out of control, can inhibit the per- in control of the outcomes of their business client may be forced to sell solid long-term formance of a long-term portfolio through activities and believe they can do the same investments that have been priced down withdrawals at inopportune times. In my with investing—they are overconfident. owing to current market conditions. view, the best approach to dealing with AIs often like to change their portfolios as these clients is to take control. Advisors who market conditions change, which often Affinity Bias let an aggressive client dictate the terms of creates a drag on investment performance. Bias type: Emotional the advisory engagement always will be at AIs are quick decision-makers; they may the mercy of the client’s irrational decision- chase higher-risk investments that their Affinity bias, another emotional bias, refers making, and the result likely will be an friends or associates are investing in. Some to investors’ tendency to make irrationally unhappy client and an unhappy advisor. AIs do not believe in basic investment uneconomical consumer choices or invest- Advisors need to prove to AI clients that principles such as diversification and asset ment decisions based on how they believe a they can help make great, objective, long- allocation; they are often hands-on types certain product or service will reflect their term decisions and that they can effectively and want to be involved in the investment values. AIs are often subject to this bias. communicate the results. Advisors who decision-making. demonstrate the ability to take control of a Outcome Bias situation will see their aggressive, emotion- The behavioral biases of AIs are overconfi- Bias type: Cognitive ally charged clients fall into line and be bet- dence, self-control, affinity, outcome, and ter clients who are easier to advise. illusion of control. This bias occurs when investors focus on the outcome of a process rather than on the Conclusion Aggressive Biases process used to attain the outcome. In the In this piece, I have discussed risk tolerance Overconfidence Bias investment realm, this behavior consists of using a behavioral finance lens and then Bias type: Emotional (with cognitive aspects) focusing on a return outcome without provided some practical steps for advisors regard to the process used (i.e., the risk to follow when working with behaviorally Overconfidence is best described as unwar- taken) to achieve the return. It is important biased clients. ranted faith in one’s own thoughts and abil- for clients to understand how the outcome ities—which contains both cognitive and was achieved, not simply the outcome itself. Continued on page 19 ➧

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RISK TOLERANCE AND BEHAVIORAL I suggest that as an advisor, you try to dis- briefing with General Richard Myers, chairman, Joint FINANCE Chiefs of Staff, on February 12, 2002, about the lack cuss these issues with your clients as often of evidence linking the government of Iraq with the Continued from page 14 as possible. I know it is not always easy to supply of weapons of mass destruction to terrorist groups, http://archive.defense.gov/Transcripts/ discuss psychological issues during the Transcript.aspx?TranscriptID=2636. When viewing risk tolerance from a behav- investment process, but if you are success- ioral finance perspective, try to identify ful, you will have very satisfied, long-term References Barber, Brad M., and Terrance Odean. 2000. Trading how your clients will react to known risks clients. Is Hazardous to Your Wealth: The Common Stock as well as unknown risks. Unknown risks Investment Performance of Individual Investors. Michael M. Pompian, CFA®, CAIA®, CFP®, is Journal of Finance 55, no. 2 (April): 773–806. that come to pass are often the source of Pompian, Michael M. 2006. Behavioral Finance and Wealth behavioral issues that can derail an invest- chief executive officer and chief investment Management. Hoboken, NJ: John Wiley & Sons, Inc. officer of Sunpointe Investments. He earned ———. 2012. Behavioral Finance and Investor Types: ment plan. Managing Behavior to Make Better Investment an MBA in finance from Tulane University and Decisions. Hoboken, NJ: John Wiley & Sons, Inc. a BS in management from the University of Wolraich, Mark L., David B. Wilson, and J. Wade White. When advising clients, it is essential to dis- 1995. The Effect of Sugar on Behavior or Cognition tinguish between the various types of biases New Hampshire. Contact him at in Children: A Meta-analysis. Journal of the American encountered. If you are dealing with emo- [email protected]. Medical Association 274, no. 20: 1,617–1,621. tional biases, your advice should be tailored to that type of behavior; if you are dealing Endnote To take the CE uiz online, visit www.IMCA.org/IWMuiz 1. This phrase is from a response that former U.S. with cognitive biases, your advice should Secretary of Defense Donald Rumsfeld gave to a reflect that situation. question at a U.S. Department of Defense news

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