Behavioral Finance
The predictable ways psychology leads investors to depart from rational choices.
What is Behavioral Finance?
Common biases: loss aversion (losses hurt about twice as much as equal gains please), anchoring (fixating on a reference price such as the purchase price), overconfidence, herding, recency bias (extrapolating the latest trend), mental accounting (treating money differently by its label), and confirmation bias. The outline lists behavioral finance as a nonfinancial consideration in the client profile.
Behavioral Finance: a worked example
A client refuses to sell a losing stock until it gets 'back to what I paid' - anchoring plus loss aversion.
More terms in Clients, Strategy & Tax
Sole Proprietorship
A business owned by one person with no legal separation from the owner.
General Partnership
Co-owners share management and unlimited liability; income passes through.
Limited Liability Company (LLC)
Limited liability for owners with pass-through taxation by default.
C Corporation
A separate taxpayer - profits taxed at the corporate level, then again as dividends.
S Corporation
A corporation that passes income through to shareholders, avoiding double tax.
Trust & Estate Accounts
Accounts run by a fiduciary - a trustee or an executor - under a governing document.
Foundations & Charities
Tax-exempt organizations investing for a mission, often in perpetuity.
Client Profile & Data Gathering
The financial and nonfinancial facts every recommendation must rest on.