ASPECTS OF INVESTOR PSYCHOLOGY

In this article, the authors argue that financial advising is a prescr iptive activity whose main objective should be to guide investors to m ake decisions that best serve their interests. To advise effectively, advisors must be guided by an accurate picture of the cognitive and em otional weaknesses of investors that relate to making investment decis ions: their occasionally faulty assessment of their own interests and true wishes, the relevant facts that they tend to ignore, and the limi ts of their ability to accept advice and to live with the decisions th ey make. The authors sketch some parts of that picture as they have em erged from research on judgment, decision-making, and regret over the last three decades. They deal with a selection of judgment biases and with errors of preference, which arise either from mistakes that peopl e make in assigning values to future outcomes, or from improper combin ations of probabilities and values. The authors provide recommendation s to help financial advisors mitigate the harmful effects of these bia ses as well as a checklist they can use to measure their effectiveness at dealing with these biases.