Weekend Reads for Financial Advisors: Brains, Behavioral Biases, and Bitcoins (and Taxes)
When last did you think about your brain? An odd question, perhaps. But given that this is the organ that controls thought, memory, emotion, touch, motor skills, vision, respirations, temperature, hunger, and every process that regulates our body, we spend surprisingly little time noodling over our gray matter.
Recently I’ve been thinking more about my brain. What got me started was an excerpt on “fear” from Jason Zweig’s book Your Money and Your Brain. My colleague Jason Voss, CFA, also wrote a blog post about this chapter: “Overcoming Anxiety Is Key to Investment Success” and Joe Nocera of the New York Times did a terrific column on the themes of the book: “Can We Turn Off Our Emotions When Investing?” It turns out “the brain is not an optimal tool for making financial decisions,” because the part of our brain that tells us to act like rational investors tends to be overtaken by more powerful emotional impulses. This has profound implications for investing behavior and financial decision-making.
So, with that in mind, here are some articles and/or resources that may be of interest, beginning with a few on behavioral finance.
- Tadas Viskanta, author of Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere, notes in a recent blog post that “one common finding in the behavioral economics literature is default options have a significant effect on individual outcomes.” He explores what this means for investors in his post: “Choosing Simplicity as a Default.” (Abnormal Returns)
- Look at any list of behavioral biases, and overconfidence will be at the top. For why we should care, see: “The Risk of Being Overconfident.” (MorningstarAdvisor)
- As Bob Seawright sees it, we are all “pattern-seeking generalists.” In a recent blog post on investment illusions, he says: “The investment management business is full of people who are convinced that they have discovered some new secret sauce that cuts through the complexities of investing successfully and provides a sure-fire winner. However, in the words of the great Benjamin Graham, an ‘investor’s chief problem — and even his worst enemy — is likely to be himself.’ We misperceive investment reality or even ‘see’ what isn’t really there.” (Above the Market)
- Meanwhile, Phil Pearlman, executive editor of StockTwits, says individual investors are an emotional wreck, and it is astonishingly bullish.
- Shane Parrish of the Farnam Street blog writes that our “most dangerous” bias is blind spot bias. In a 2012 post, he explains why. Parrish has put together a great reading list on behavioral economics. Not on the list, but perhaps worth a look, is Behavioral Finance: Understanding the Social, Cognitive and Economic Debates by Edwin R. Burton and Sunit N. Shah (published in March 2013). Burton is a professor of economics at the University of Virginia where he teaches a class on behavioral finance. (Disclaimer: I have not yet read the book, but just attended a seminar where Burton was a speaker.)
- The monograph Behavioral Finance and Investment Management, published in 2010, is a great primer. The chapters include “What is Behavioral Finance?” by Meir Statman, “The End of Behavioral Finance” by Richard H. Thaler, and “Fear” by Jason Zweig. (The Research Foundation of CFA Institute)
- The New York Times recently collaborated with American Public Media’s Marketplace Money radio program on a series of stories that illustrate where money and emotions collide.
- A neuroscientist at Stanford has invented a technique to make brains transparent, a breakthrough that should give researchers a truer picture of the pathways underlying both normal mental function and neurological illnesses from autism to Alzheimer’s. (Reuters)
- The New York Times article says this new process that makes brains transparent, known as Clarity, “may help uncover the physical underpinnings of devastating mental disorders like schizophrenia, autism, post-traumatic stress disorder and others.”
- Dan Loeb’s investment process. (The Reformed Broker)
Practice Management / Firm Dynamics
- At your workplace, are you a giver, a taker, or a matcher? If you’re a giver, chances are you will be the one most likely to get ahead, according to the article “Is Giving the Secret to Getting Ahead?” The piece explores the work of organizational psychologist Adam Grant, author of the recently published book Give and Take: A Revolutionary Approach to Success, which “incorporates scores of studies and personal case histories that suggest the benefits of an attitude of extreme giving at work.” (New York Times Magazine)
- Here’s a simple, 60-second primer on Bitcoin. (Wonkblog)
- How does one actually buy a bitcoin? “I Bought a Bitcoin” (New York Magazine)
- “The Bitcoin Boom” (The New Yorker)
- “Bitcoins: New Gold or Fool’s Gold?” (Enterprising Investor)
- According to the bloggers at Dealbook, “Cameron and Tyler Winklevoss have been many things in a short time: Olympic rowers. Nemeses of Mark Zuckerberg. Characters on The Simpsons. Now they can add a new label: bitcoin moguls.”
- Something to think about if you have aging clients (or parents) who will be retiring in the coming decades: “Dementia Care Cost Is Projected to Double by 2040.” (New York Times)
Taxes/Budget for Fiscal Year 2014
- Parametric has created a handy after-tax-growth tool that factors in the new tax rate environment and calculates the impact of taxes on long-term investments, allowing investors to select their return expectations, state, federal, or custom tax rates and measure firsthand the dilutive impact of increased taxes.
- President Barack Obama proposed a $3.77 trillion budget that combines controversial cuts to social safety net programs with tax increases on the wealthy. (Reuters)
- “President’s Budget Can Hit Investors Hard” (Twenty-First Securities Corporation)
- “Estate Planning in the Age of Obama” (AdvisorOne)
- Attorney Julius Giarmarco has put together a PowerPoint presentation titled “Estate Planning in 2013.” The presentation covers the changes brought about under the American Taxpayer Relief Act of 2012 and offers sophisticated tax planning advice and techniques for married couples with estates under $5.25 million, couples in the $5 million–$10 million range, and for those couples with estates above $10 million. (Wealth Strategies Journal)
And Now For Something Completely Different
- “Diagnosis: Human” (New York Times)
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
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