1 INTRODUCTION To differentiate the study of individual investor behavior from the study of collective market behavior, the subject of behavioral fina

READING 6. LEARNING OUTCOMES The Candidate should be able to : Mastery a. distinguish between cognitive errors and emotional biases; b. discuss commonly recognized behavioral biases and their implications for financial decision making; c. identify and evaluate an individual s behavioral biases; d. evaluate how behavioral biases affect investment policy and asset allocation decisions and recommend approaches to mitigate their effects. 6-1

1 INTRODUCTION To differentiate the study of individual investor behavior from the study of collective market behavior, the subject of behavioral finance can be classified as Behavioral Finance Micro (BFMI) and Behavioral Finance Macro (BFMA). BFMI examines the behavioral biases that distinguish individual investors from the rational decision makers of traditional finance. BFMA detects and describes market anomalies that distinguish markets from the efficient markets of traditional finance. 전통적 재무이론에서 가정하는 것과는 달리, 의사결정자들은 완벽한 최적의사결정에 이르기 위한 시간도 없으며 그럴 능력도 없다. 개인들은 선택대안들은 단순화하고 가능한 일부 정보만을 사용하며 보다 적은 수에서 선택하기 위해 일부 가능한 대안들을 포기하는 등의 방법으로 나름대로 좋은 의사결정을 하기 위해 노력할 뿐이다. 즉, 최적의 솔루션을 구하기보다는 나름대로 좋은 (good enough) 해답을 받아 들이는데 만족한다. 이렇게 될 경우, 사람들은 자신도 모르게 의사결정과정에 bias를 갖게 되고, 이러한 bias들로 인해 비합리적 행태와 의사결정이 생기게 된다. By understanding behavioral biases, investment professionals may be able to improve economic outcomes. This may entail identifying behavioral biases they themselves exhibit or behavioral biases of others, including clients. Once a behavioral bias has been identified, it may be possible to either moderate the bias or adapt to the bias so that the resulting financial decisions more closely match the rational financial decisions assumed by traditional finance. Knowledge of and integration of behavioral and traditional finance may lead to superior results. 6-2

2 Categorizations Of Behavioral Biases The simple categorization of distinguishing between biases based on faulty cognitive reasoning (cognitive errors) and those based on reasoning influenced by feelings or emotions (emotional biases) is used in this reading. Cognitive errors stem from basic statistical, information- processing, or memory errors; cognitive errors may be considered the result of faulty reasoning. Emotional biases stem from impulse or intuition; emotional biases may be considered to result from reasoning influenced by feelings. Behavioral biases, regardless of their source, may cause decisions to deviate from the assumed rational decisions of traditional finance. 2.1 Differences between Cognitive Errors and Emotional Biases Cognitive errors are more easily corrected than emotional biases. Cognitive errors는 잘못된 추론과정에서 기인되기 때문에 보다 나은 정보, 교육, 그리고 조언 등으로 바로 잡힐 수 있다. 따라서, 대부분의 인지적 bias들은 "moderated" 될 수 있다. (bias의 효과를 moderate한다는 것은 해당 bias를 인식하여 감소시키거나 제거하려는 것을 의미한다.) Because emotional biases stem from impulse or intuition especially personal and sometimes unreasoned judgments they are less easily corrected. Emotions may be undesired by the individual feeling them; he or she may wish to control them but often cannot. 따라서 emotional bias는 이를 인식하고 "adapt" 할 수 있을 뿐이다. "adapt"한다는 것은 bias를 감소 혹은 제거시키려고 하기 보다는 emotional bias를 인정하고 의사결정과정에 이를 고려하는 것을 의미한다. The cognitive emotional distinction will help us determine when and how to adjust for behavioral biases in financial decision making. However, it should be noted that specific biases may have some common aspects and that a specific bias may seem to have both cognitive and emotional aspects. 6-3

3 Cognitive Errors We will now review nine specific cognitive errors, their implications for financial decision making, and suggestions for correcting for them. We classify cognitive errors into two categories : belief perseverance and processing errors. The first category contains belief perseverance biases. In general, belief perseverance is the tendency to cling to one s previously held beliefs irrationally or illogically. The belief continues to be held and justified by committing statistical, informationprocessing, or memory errors. A second category of cognitive error has to do with processing errors, describing how information may be processed and used illogically or irrationally in financial decision making. In this reading, the individuals of interest are financial market participants ( FMPs ) engaged in financial decision making. 3.1 Belief Perseverance Biases Belief Perseverance Bias는 심리적 개념인 '인지부조화(cognitive dissonance)'와 깊은 관련 이 있다. cognitive dissonance란 새로운 정보가 기존의 믿음 혹은 인지내용과 충돌할 때 생기는 정신적 불편함을 뜻한다. Conservatism Bias Conservatism bias is a belief perseverance bias in which people maintain their prior views or forecasts by inadequately incorporating new information. This bias has aspects of both statistical and information-processing errors. 실증결과는 사람들이 어떤 일에 대한 발생확률과 결과에 대해 기존의 믿음에 대하여는 가중치를 높게 주고 새로운 정보에는 덜 반응하는 것으로 나타났다. * Baysesian접근에서도 base rate에 대해서는 overweight하지만, new information에는 underweight하게 된다. 따라서 'conservatism bias'를 'Bayseian rigidity'라고도 한다. As a result of conservatism bias, FMPs may underreact to or fail to act on new information and continue to maintain beliefs close to those based on previous estimates and information. 6-4

Example 1 Conservatism in Action James Montier writes, The stock market has a tendency to underreact to fundamental information be it dividend omissions, initiations or an earnings report. When discussing the behavior of security analysts, Montier explains, People tend to cling tenaciously to a view or a forecast. Once a position has been stated, most people find it very hard to move away from that view. When movement does occur, it does so only very slowly. Psychologists call this conservatism bias. The chart below shows conservatism in analysts forecasts. We have taken a linear time trend out of both the operating earnings numbers, and the analysts forecasts. A cursory glance at the chart reveals that analysts are exceptionally good at telling you what has just happened. They have invested too heavily in their view, and hence will only change it when presented with indisputable evidence of its falsehood. The chart accompanying Montier s analysis (2002b) appears as Exhibit 1. Discuss Montier s analysis in the context of biases of individuals. EXHIBIT 1 Analysts Lag Reality SOLUTION In relating conservatism to security analysts, Montier provides clear evidence of the conservatism bias in action: The analysts maintain their forecasts even when presented with new information. The behavior observed in security analysts can logically be extended to individual investors who are likely to engage in similar behavior when managing their own investment portfolios. 6-5

Consequences of Conservatism Bias Maintain or be slow to update a view or a forecast, even when presented with new information. : 예를 들어, 어느 투자자가 신약에 대한 당국의 승인이 임박했다는 기대로 제약주를 매수했다고 가정하자. 주식매입 후 회사가 승인상의 어려움을 겪고 있다고 발표 하더라도 투자자는 초기 믿음에 집착하여 새로운 정보에 천천히 반응하게 되며, 결과적으 로 합리적 투자자에 비해 해당 주식을 오랫동안 보유하게 된다. Opt to maintain a prior belief rather than deal with the mental stress of updating beliefs given complex data. : 해석하기 어려운 복잡한 상황이 발생했을 때, 이를 철저히 분석해서 새로운 결론을 이끌어 내기 보다는 기존의 믿음을 유지하려는 경향이 있으며, 결국 합리적 투자자에 비해 해당 주식을 오래 보유하게 된다. Detection of and Guidance for Overcoming Conservatism Bias conservatism bias는 새로운 정보를 적절하게 분석하고 가중치를 부여함으로써 교정되고 감소될 수 있다. The first step is to be aware that a bias exists. Information that is cognitively inexpensive (easily processed) may receive a higher weighting. As a result, individuals may overreact to information that is easily processed and may even underweight base rates. FMPs should conduct careful analysis incorporating the new information and then respond appropriately. 취해야 할 적절한 행위가 분명해지면, 비록 그것이 기존정보와 믿음에 기초한 행위와 다르더라도 지체 없이 수행되어 질 것이다. 해석하기 어려워서 새로운 정보를 무시하는 것이라면, 전문가의 조언을 구해야 할 것이다. Confirmation Bias Confirmation bias is a belief perseverance bias in which people tend to look for and notice what confirms their beliefs, and to ignore or undervalue what contradicts their beliefs. 이러한 행위는 때로 '선택적 편의 (selection bias)'라고도 한다. 정보가 자신들의 믿음을 지지할 경우 긍정적(positive)으로 인식되고, 믿음과 다를 경우 부정적(negative)으로 인식된다. 많은 연구자들이 자신이 설정한 가설을 확인하고 지지하는 연구결과를 얻기 위해 실험과정과 연구틀을 셋팅하는 경향이 있는데, 이것이 바로 전형적인 'confirmation bias'이다. The confirmation bias is not limited to individual investors; all FMPs should be wary of the potential confirmation biases within themselves. 6-6

Consequences of Confirmation Bias 투자의 세계에서 confirmation bias는 반복적으로 나타난다. FMPs may do the following: Consider only the positive information about an existing investment and ignore any negative information about the investment. Develop screening criteria and ignore information that either refutes the validity of the screening criteria or supports other screening criteria. Under-diversify portfolios, leading to excessive exposure to risk. Hold a disproportionate amount of their investment assets in their employing company s stock because they believe in their company and are convinced of its favorable prospects. Detection of and Guidance for Overcoming Confirmation Bias confirmation bias는 기존의 믿음에 도전하는 정보를 적극적으로 찾아 나섬으로써 감소되 고 교정될 수 있다. The conscious effort to gather and process negative information (information that challenges a belief), as well as positive information, provides more complete information on which to base a decision. Another useful step is to get corroborating support for an investment decision. Representativeness Bias Representativeness bias is a belief perseverance bias in which people tend to classify new information based on past experiences and classifications. 자신들의 과거 경험과 개인적으로 형성된 분류체계를 바탕으로 새로운 정보를 분석하므로, 해당 정보가 기존의 형성된 분류체계에 맞지 않음에도 불구하고 고정관념으로 해석하게 된다. Although this perceptual framework provides an expedient tool for processing new information, it may lead to statistical and information-processing errors. The new information superficially resembles or is representative of familiar elements already classified, but in reality it can be very different. Base-Rate Neglect. In base-rate neglect, the base rate or probability of the categorization is not adequately considered. 예를 들어, 어떤 투자자는 익숙하고 이해하기 쉬운 본인의 분류체계에 의존하여 ABC주식을 "growth stock"으로 분류하고, 잠재적 투자성공을 결정하려고 한다. 이러한 분류는 성장기업에 대한 본인의 믿음과 일치하는 ABC기업의 일부 정보에 기초한 것이지만, 성장기업을 결정하는 base probability를 무시한 것이다. FMPs often follow this erroneous path because it is an easy alternative to the diligent research actually required when evaluating investments. 6-7

To rephrase this error, some FMPs rely on stereotypes when making investment decisions without adequately incorporating the base probability of the stereotype occurring. Sample-Size Neglect. 작은 sample size가 모집단을 대표하는 'real data'로 착각되는 현상 을 말하며, 'law of small numbers'라고도 한다. Individuals prone to sample-size neglect are quick to treat properties reflected in small samples as properties that accurately describe large pools of data. They overweight the information in the small sample. Example 2 Representativeness APM Company is a large, 50-year old auto parts manufacturer having some business difficulties. It has previously been classified as a value stock. Jacques Verte is evaluating the future prospects of the company. Over the 50-year life of APM, there have been few failures of large auto parts manufacturers even given periods of difficulty. There have been a number of recent headlines about auto parts manufacturers having business and financial difficulty and potentially going out of business. He is considering two possibilities: A. APM will solve its difficulties, the company s performance will revert to the mean, and the stock will again be a value stock. B. APM will go out of business, and the stock will be come valueless. 1. Is Scenario A or B more likely? Explain why. 2. If Verte is subject to representativeness bias, is he more likely to classify APM into A or B? Explain why. Solution to 1 Scenario A. It is more likely that APM will solve its difficulties, the company s performance will revert to the mean, and the stock will again be a value stock. The base rate, based on 50 years of data, is that more auto parts companies revert to the mean rather than go out of business. Solution to 2 Verte is likely to classify APM as B, predicting that it will go out of business because he read some headlines about other auto parts manufacturers going out of business. Verte, in classifying APM as likely to go out of business, may be guilty of both base-rate neglect and sample-size neglect. He has potentially ignored the base-rate information that far more auto parts manufacturers revert to the mean rather than go out of business, and he has assumed that the small sample of failing auto parts manufacturers is representative of all auto parts manufacturers. 6-8

4 Emotional Biases Emotional biases are harder to correct for than cognitive errors because they originate from impulse or intuition rather than conscious calculations. In the case of emotional biases, it may only be possible to recognize the bias and adapt to it rather than correct for it. 4.1 Loss-Aversion Bias Loss-aversion bias was identified by Daniel Kahneman and Amos Tversky in 1979 while they were working on developing prospect theory. In prospect theory, loss-aversion bias is a bias in which people tend to strongly prefer avoiding losses as opposed to achieving gains. A number of studies on loss aversion suggest that, psychologically, losses are significantly more powerful than gains. When comparing absolute values, the utility derived from a gain is much lower than the utility given up with an equivalent loss. Loss aversion leads people to hold their losers even if an investment has little or no chance of going back up. Similarly, loss-aversion bias leads to risk avoidance when people evaluate a potential gain. Given the possibility of giving back gains already realized, FMPs lock in profits, thus limiting their upside profits. reference point Exhibit 3에 나타난 것처럼, reference point를 중심으로 value function은 손실구간에서는 이익구간에 비해 동일한 양의 변화에 따른 효과가 더 크게 나타나는 'S'자 모형을 형성하고 있다. 이는 효용함수가 손실영역에서는 risk-seeking 행태를, 이익영역에서는 riskavoidance행태를 보이고 있음을 시사한다. Shefrin and Statman(1985)은 이를 'disposition effect'로 설명하고 있다. 손실을 기록하고 있는 투자안은 너무 오래 보유하고, 이익을 본 투자안은 너무 빨리 처분함으로써 궁극적으로 투자자의 risk/return 목적에 비추어 보다 위험한 투자안을 보유하게 되는 현상을 말한다. 6-9

Exhibit 8 Value Function Of Loss Aversion Example 4 Effect of Loss-Aversion Bias Loss-aversion bias, executed in practice as the disposition effect, is observed often by wealth management practitioners. The classic case of this bias is when an investor opens the monthly account statement and scans the individual investments for winners and losers. Seeing that some investments have lost money and others have gained, discuss how the investor is likely to respond given a loss-aversion bias. Solution The investor is likely to respond by continuing to hold the losing investments. The idea of actually losing money is so painful that the first reaction is to hold the investment until it breaks even. The investor is acting based on emotions, not cognitive reasoning. In this case, if the investor did some research, he or she might learn that the company in question is experiencing difficulty and that holding the investment actually adds to the risk in the portfolio (hence the term risk-seeking in the domain of losses). Conversely, the winners are making money. Loss-averse FMPs have a tendency to sell these investments and realize their gains to avoid any further risk. In this case, if the investor did some research, he or she might learn that the company in question actually improves the risk/return profile of the portfolio. By selling the investment, not only is the potential for future losses eliminated, but the potential for future gains is also eliminated. Combining the added risk of holding the losers with the elimination of potential gains from selling the winners may make investors portfolios less efficient than portfolios based on fundamental analysis. 6-10

Consequences of Loss Aversion As a result of loss-aversion bias, FMPs may do the following: Hold investments in a loss position longer than justified by fundamental analysis. Sell investments in a gain position earlier than justified by fundamental analysis. Limit the upside potential of a portfolio by selling winners and holding losers. Trade excessively as a result of selling winners. Hold riskier portfolios than is acceptable based on the risk/return objectives of the FMP. Special Application: Myopic Loss Aversion 주식이 채권에 비해 비정상적으로 높은 역사적 수익률을 기록하는 현상으로 'equity premium puzzle'이 존재하는데, 이에 대한 설명으로 사용된다. Benartzi and Thaler use the term myopic loss aversion in reference to this behavior. They argue that investors evaluate their portfolios on an annual basis and as a result overemphasize short-term gains and losses and weigh losses more heavily than gains. The overemphasis on short-term losses results in a higher than theoretically justified equity risk premium. Detection of and Guidelines for Overcoming Loss Aversion A disciplined approach to investment based on fundamental analysis is a good way to alleviate the impact of the loss-aversion bias. 4.2 Overconfidence Bias Overconfidence bias is a bias in which people demonstrate unwarranted faith in their own intuitive reasoning, judgments, and/or cognitive abilities. 일반적으로 사람들은 예측하는데 서툴지만, 실제에 비해 현명하고 많은 정보를 지니고 있는 것으로 믿기 때문에 보다 예측을 잘할 것으로 믿는다 : This view is sometimes referred to as the illusion of knowledge bias. Overconfidence may be intensified when combined with self-attribution bias. --> Illusion of knowledge and self-attribution biases contribute to the overconfidence bias Overconfidence bias has aspects of both cognitive and emotional errors but is classified as emotional because the bias is primarily the result of emotion. 6-11

5 Investment Policy And Asset Allocation There are two basic types of overconfidence bias rooted in the illusion of knowledge: prediction overconfidence and certainty overconfidence. Prediction overconfidence occurs when the confidence intervals that FMPs assign to their investment predictions are too narrow. --> As a result of underestimating risks, particularly downside risks, FMPs may hold poorly diversified portfolios. Certainty overconfidence occurs when the probabilities that FMPs assign to outcomes are too high because they are too certain of their judgments. --> People susceptible to certainty overconfidence often trade too frequently. Example 5 Prediction and Certainty Overconfidence Prediction Overconfidence: Clarke and Statman (2000) demonstrated prediction overconfidence when they asked investors the following question: In 1896, the Dow Jones Industrial Average, which is a price index that does not include dividend reinvestment, was at 40. In 1998 it crossed 9,000. If dividends had been reinvested, what do you think the value of the DJIA would be in 1998? In addition to that guess, also predict a high and low range so that you feel 90 percent confident that your answer is between your high and low guesses. In the survey, few responses reasonably approximated the potential 1998 value of the Dow, and no one estimated a correct confidence interval. (The 1998 value of the DJIA, under the conditions posed in the survey, would have been 652,230!) Certainty Overconfidence: People display certainty overconfidence in everyday life situations, and that overconfidence carries over into the investment arena. People have too much confidence in the accuracy of their own judgments. As people learn more about a situation, the accuracy of their judgments may increase but their confidence may increase even more; as a result, they may fallaciously equate the quantity of information with its quality. Confidence also tends to increase if people are given incentives to perform. 6-12

Behavioral biases can and should be accounted for by investors and their advisers in the investment policy development and asset allocation selection process. Behavioral finance considerations may have their own place in the constraints section of the investment policy statement along with liquidity, time horizon, taxes, legal and regulatory environment, and unique circumstances. 다음과 같은 질문을 고려하면서 적절한 대답을 생각해 보는 것이 behavioral finance가 투자의사결정과 그에 따른 포트폴리오에 미치는 영향을 체계적으로 파악하는데 도움이 된다. 1. Which biases does the client show evidence of? 2. Which bias type dominates (cognitive or emotional)? 3. What effect do the client s biases have on the asset allocation decision? 4. What adjustment should be made to a rational (risk tolerance-based) asset allocation that can account for the client s behavioral make-up? Taking a goals-based investment approach to asset allocation is helpful in terms of keeping financial goals in mind and understanding how much risk can be taken when creating a portfolio. Exhibit 4 illustrates a goals-based investing approach. Such an approach matches many investors natural desire to put money in separate mental accounts and to focus on loss as a measure of risk. Exhibit 4 Goals-Based Investing Approach 6-13

Exhibit 7 Basic Diagnostic Questions for Behavioral Bias Behavioral Bias Loss Aversion Endowment Status Quo Anchoring Mental Accounting Regret Aversion Hindsight Framing Conservatism Availability Representativeness Overconfidence Confirmation Illusion of Control Self-Control Diagnostic Question Imagine you make an investment that drops 25 percent in the first six months. You are unsure if it will come back. What would you normally do (NOT what you think you should do; what you would do)? How would you describe your emotional attachment to possessions or investment holdings? How would you describe the frequency of your trading? You purchase a stock at $50 per share. It goes up to $60 in a few months, and then it drops to $40 a few months later. You are uncertain what will happen next. How would you respond to this scenario? Generally, do you categorize your money by different financial goals, or do you look at the bigger financial picture? Have you ever made an investment that you have regretted making? How did that affect your future investing decisions? Do you believe investment outcomes are generally predictable or unpredictable? Assume you have agreed to a financial plan created by your adviser that has a projected return of 9 percent and an annual standard deviation of +/-15% (a typical plan). Would it surprise you to know that statistically in the worst case, the plan s return could be negative 36 percent or more in one year out of 100? Would this information cause you to rethink your risk tolerance? Assume you make an investment based on your own research. An adviser presents you with information that contradicts your belief about this investment. How would you respond? Do you ever make investment decisions (such as selecting a mutual fund or online broker) based on word-of-mouth or name recognition? Have you ever made a new investment because of its apparent similarity to a past successful investment (e.g., a tech stock or value stock) without doing research to validate the new investment s merits? Suppose you make a winning investment. How do you generally attribute the success of your decision? Suppose you make an investment based on your own research. The investment doesn t move up as much as you thought it might. How are you likely to respond? You are offered two free lottery tickets. You may either select your own numbers or have a machine do it. What would you do? Do you tend to save or spend disposable income? 6-14

Case Study #1: Mr. Renaldo (High Wealth Level, Emotional Biases) Mr. Renaldo ( Mr. R ) is a single, 58-year-old, hard-working, international corporate lawyer (an employee of a large multinational company). He earns a salary of 600,000 annually. He has residences in both London and New York and generally lives within his annual income net of taxes. He occasionally spends more than his net income, but in other years he saves and invests. His current portfolio is worth approximately 3,500,000. It reached this value primarily because of some successful high risk oil and technology investments as well as stock options granted by his employer. Mr. R has no plans for marriage or children. He had a mild heart attack last year, but he has made a full recovery. His primary financial goal is to retire comfortably at age 65 with a reduced spending level of 150,000 and to bequeath any assets remaining at his death to his alma mater, Oxford University. Mr. R s financial adviser, Mr. Bobby Moore, has been working with Mr. R for less than a year. During that time, Moore has proposed a comprehensive financial plan. Despite Moore s recommendations, however, Mr. R s asset allocation has remained the same at nearly 80 percent equities, with 40 percent in his employing company s publicly traded stock. Still, Moore has developed a good working relationship with Mr. R. In Moore s view, the most important issue is that Mr. R has not taken action yet on the new, more conservative allocation that Moore proposed months ago of 60 percent stocks, 30 percent bonds, and 10 percent cash. Moore s financial plan demonstrates that even with a somewhat less aggressive portfolio, Mr. R could still meet his primary financial objectives if he could save just 25,000 annually. Moore believes that one of the issues is that Mr. R thinks of himself as a very savvy investor because of some risky bets that worked out well for him in the past. Moore suspects that Mr. R hasn t changed his allocation because he thinks Moore s allocation recommendation is too conservative. Bias에 대한 설문조사결과 : Curriculum Book(Page 89-91)에 있는 내용은 수강생 스스로 반 드시 읽어보기 바랍니다. Through this process, Moore finds that Mr. R is indeed susceptible to the following emotional biases: Regret-aversion bias (the tendency to avoid making a decision for fear the decision may cause regret later). Overconfidence bias (the tendency to overestimate one s investment savvy). Self-control bias (the tendency to spend today rather than save for tomorrow). 6-15

Solutions to Mr. Renaldo Case Study Effect of Biases? Mr. Renaldo는 emotional bias를 가지고 있으며 이에 따라 자연스럽게 주식중심으로 포트폴리오를 구성하게 된다. overconfidence와 endowment bias로 인해 company stock 보유비중이 높아지게 되었다. 한편, 시장 하락기에 자연스럽게 현재의 소비수준을 보충할 수 있는 소득을 제공해 줄 수 있는 fixed-income자산비중이 커질 필요가 있다. Because his level of wealth is high, however, he does have some flexibility with his allocation to favor equity over fixed income. Moderate or Adapt? 부의 수준과 SLR이 작다는 점, 그리고 behavioral bias가 주로 emotional이라는 점을 고려할 때 "adapt"해야 할 것이다. Given these facts, and given that he naturally prefers an allocation favoring equity, Moore now has the information with which to make the following graph and the moderate, adapt, or both moderate and adapt recommendation. Exhibit 9 Illustration of Mr. Renaldo s Case Study Information Behaviorally Modified Portfolio Decision : Mean-Variance Optimizer's Recommended Allocation 60% Stocks 30% Bonds 10% Cash Behaviorally Modified Asset Allocation 70% Stocks 20% Bonds 10% Cash 6-16

Case Study #2: Mrs. Maradona (Lower Wealth Level, Cognitive Biases) Mrs. Maradona ( Mrs. M ) is a 75-year-old widow from the United States with a modest lifestyle and no income beyond what her investment portfolio of $1,500,000 generates (about $90,000 per year) and a small government pension of $10,000 annually. Her adviser, Mr. Bobby Moore, has known Mrs. M for about five years. Although Mrs. M did not clearly articulate her investment goals when Moore first started working with her, over time Moore has learned that Mrs. M s primary investment goals are 1) to not lose money and 2) to maintain the purchasing power of her assets after fees and taxes. Her desire to not lose money stems from the fact that she recalls that her parents lost money in the U.S. market crash of 1929; she has a Depression Era mentality. One of her tendencies is to spread her money around many different banks, and she speaks regularly about various pots of money such as one for generating her income, one for her grandson s education, and one for paying her bills. Moore has been challenged by the fact that Mrs. M is quite stubborn in her opinions and rarely, if ever, listens to Moore when he recommends that she change her way of thinking about her investment money and portfolio allocation. Her knowledge of financial concepts is limited, but she is willing to meet regularly and discuss issues with Moore over tea. 중요한 문제는 Mrs. M이 오직 현금과 채권중심의 portfolio를 구성하여 'risk to outlive assets'에 직면하게 될 가능성이다. Bias에 대한 설문조사결과 : 커리큘럼북에 있는 내용을 수강생 스스로 반드시 읽어 보기 바 랍니다. Loss-aversion bias (the tendency to feel the pain of losses more acutely than the pleasure of gains). Anchoring and adjustment bias (the tendency to believe that current market levels are right ; up or down directional estimates are made from the current level). Mental accounting bias (the tendency to segregate money into different accounts. ) Solutions to Mrs. Maradona Case Study Effect of Biases : 주로 cognitive bias가 영향을 미쳐서 100% Bond로 구성된 포트폴리오를 보유하고 있다. Moderate or Adapt? low 하지는 않지만 high 하지도 않은 부의 수준으로 Mrs. R은 상대적으로 높은 SLR을 보유하고 있다. 만일 Adapt한다면, 100% Bond를 중심으로 수정해야 하는데 그럴 경우 초과생존의 위험에 직면할 수 있다. 따라서 적극적으로 moderate 하는 것이 바람직하다. 6-17

Exhibit 11 Illustration of Mrs. Maradona s Case Study Information 6-18