Thursday, November 17, 2011

Voices: John Longo, On Behavorial Finance - Financial Adviser - WSJ

Voices: John Longo, On Behavorial Finance - Financial Adviser - WSJ:
"There are two broad types of mistakes that investors make. The first is cognitive biases....

The second type of mistake is a behavioral bias, which is more insidious. A non-financial example of this is a smoker who knows that smoking is bad for his or her health but continues to smoke anyways because of the short-term pleasure of the experience."
Which is a nice introduction to behavioral finance. But what is more interesting and why the article gets mentioned is what his firm does with this information:

"We cover the first 12% of losses, and then the product doubles the return of the S&P, up to a cap. This gives our clients peace of mind because they are essentially shielded from small market downturns, such as the two we’ve seen this year. This makes them less likely to panic and make mistakes."

Which is exactly the type of thing that should be developed to protect ourselves from ourselves.

(note to my students: tying this to Ariely's comments that we wear glasses for our eyes, but must develop similar type technologies to deal with our mental biases, would make a great test question :) )

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