New Book Spotlights Behavioral Finance

Did you know that an investor may be more likely to hold on to a money-loser if he bought it himself than if he inherited it? That people born with the “warrior gene” will take more risks? Or that trust is essential to whether individuals prepare for retirement?

A new edited volume, “Investor Behavior: the Psychology of Financial Planning and Investing,” is a thorough tour of the research on these and other aspects of behavioral finance.  The book was compiled for financial planners, investment professionals, academics, and finance students and edited by two finance professors, H. Kent Baker of American University’s Kogod School of Business and Victor Ricciardi of Goucher College.

The field of behavioral finance is gaining traction as financial experts increasingly recognize that psychology, sociology, neurology and other fields may have something to say about why people behave the way they do around money.

Traditional theories explaining investor behavior, such as modern portfolio and utility theory, assume that people make “rational” choices.  In contrast, the research covered in this new book tries to explain why financial decisions are not always rational, are often infused with emotion, and can be very predictable.  Or, as 1978 Nobel laureate Herbert Simon once explained, orthodox finance’s “traditional paradigm did not describe the behavior of real people,” the book says.

Prominent behavioral economists such as Richard Thaler, Daniel Kahneman, and Robert Shiller did not contribute to this edited volume, but their work is among the research covered in 30 chapters of “Investor Behavior.” Here is a sampling of the chapters, which are written by academics and practitioners:

• Personality Traits
• Demographic and Socioeconomic Factors of Investors
• The Effect of Religion on Financial and Investing Decisions
• Money and Happiness: Implications for Investor Behavior
• Financial Therapy: De-Biasing and Client Behaviors
• Neurofinance
• Post-Crisis Investor Behavior: Experience Matters.

Look for blog posts in the future describing some of the book’s contents.