Study Session3：Behavioral Finance-R6：The Behavioral Finance Perspective
Mimi Fong, CFA, a private wealth manager with an asset management firm, has been asked to make a presentation to her colleagues comparing traditional and behavioral finance. She decides to enliven her presentation with statements from colleagues and clients. These statements are intended to demonstrate some key aspects of and differences between traditional and behavioral finance.
Statement 1 (from a colleague): "When new information on a company becomes available，I adjust my expectations for that company’s stock based on       past experiences with similar information."
Statement 2 (from a client): “When considering investments，I have always liked using long option positions. I like their risk/retum tradeoffs. My personal estimates of the probability of gains seem to be higher than that implied by the market prices. I am not sure how to explain that, but to me long options provide tremendous upside potential with little risk, given the low probability of limited losses."
Statement 3 (from a client): UI have always followed a budget and have been a disciplined saver for decades. Even in hard times when I had to reduce my usual discretionary spending，I always managed to save.”
Statement 4 (from a colleague): "While I try to make decisions analytically, I do believe the markets can be driven by the emotions of others. So I have frequently used buy/sell signals when investing. Also, my 20 years of experience with managers who actively trade on such information makes me think they are worth the fees they charge.”
Statement 5 (from a colleague): "Most of my clients need a well-informed advisor to analyze investment choices and to educate them on their opportunities. They prefer to be presented with three to six viable strategies to achieve their goals. They like to be able to match their goals with specific investment allocations or layers of their portfolio."
Statement 6 (from a client): "I follow a disciplined approach to investing. When a stock has appreciated by 15 percent, I sell it. Also, I sell a stock when its price has declined by 25 percent from my initial purchase price."
Statement 7 (from a client): ''Overall, I have always been willing to take a small chance of losing up to 8 percent of the portfolio annually. I can accept any asset classes to meet my financial goals if this constraint is considered. In other words, an acceptable portfolio will satisfy the following condition: Expected return - 1.645 x Expected standard deviation ≥ -8%."
Behavioral Finance