ISSN: 0974-5823 Vol. 6 No.

3 December, 2021
International Journal of Mechanical Engineering

BOOK REVIEW Michael M. Pompian:

“Behavioral Finance and Your Portfolio: A
Navigation Guide for Building Wealth, New
Jersey, John Wiley & Sons, Inc. (2021), ISBN
978-1-119-80161-0”
Umesh Kumar
Faculty, Department of Commerce, I.G. Govt. College, Tohana (Fatehabad), Haryana

This is the bottommost book written by Michael that when considering behavioral biases in asset
M. Pompian who is an author, founder, Chief allocation, financial advisors must first determine
Investment Officer of Sunpointe Investments, whether to adapt to moderate or irrational client
partner at Mercer Investment Consulting and a preferences. It basically involves weighing the
wealth management advisory. rewards of maintaining a calculated, profit-
maximizing allocation against the outcome of
He writes this book from the perspective of an
potentially humiliating the client, whose bias may
investor and builds the optimal portfolio keeping
position them to favor a different portfolio
in mind the so called 'biased investor behavior'.
structure altogether. The principles set forth in
Behavioral finance is considered a parallel theory
this section provide guidelines for solving the
to standard finance theory.
puzzle "When to moderate, when to optimize?"
The author provides an outlook, understanding of
The part two of this book explains about the
concepts by case studies, diagnosis of bias and
endurance of beliefs is a cognitive bias. This part
suggestions to investors with clear terminology
covers different types of bias including belief
and descriptions of different approaches which
persistence bias, cognitive dissonance bias,
are crucial for making investments. The book is
conservatism bias, confirmation bias,
spread over 320 Pages consisting of six parts and
representational bias, the so-called ‘illusion of
thirty two chapters.
control bias’, hindsight bias in detail with
The focal point of this book is on the potentially examples. The bottom line in overcoming the
irrational investment behavior and possible negative behavioral effects of cognitive
efforts to build better portfolios for individual dissonance is that clients must immediately
investors who want to (systematically) take acknowledge that a faulty cognition has occurred.
irrational behavior into account.
Part three focuses on cognitively biased
Unlike other monographs, this book focuses on information processing. The cognitive
individual investors, who aim to critically information processing induced by these biases
examine irrational behavior and behavioral has a variety of effects.
biases in investment decisions.
This section describes about the
The first part of this book provides an
a) Mental accounting bias: It elaborates the
introduction to the practical application of
tendency of people to code, classify, and
behavioral finance. These chapters comprise an
estimate economic results by grouping their
overview of behavioral finance at the individual
assets into any number of irreconcilable
investor level and the behavioral biases used
mental accounts.
when incorporating investor behavior into the
asset allocation process. To review, remember
Copyrights @Kalahari Journals Vol. 6 No. 3(December, 2021)
International Journal of Mechanical Engineering
4289
b) Anchoring bias: This reduces the subject's implementation: it discusses the behavioral
ability to incorporate updated information. finance aspects of the so-called "active/passive
This behavior can have significant implications debate", and used examples of behaviorally
for the investment sector and should be widely conscious portfolio construction.
consulted.
In short, this book not only lists diagnostic
c) Framing bias: It notes the tendency of decision
questions to identify and describe cases of
makers to respond differently in different
susceptibility to bias, but it also gives several
situations depending on the context in which a
examples of case studies on building a portfolio
choice is presented.
with this newfound awareness.
d) Availability bias: The availability bias is a rule
In case, for understanding the cognitive bias and
of thumb, or mental short-cut, that allows
emotional bias that exist in investors (Parts Two,
people to estimate the profitability of an
Three and Four), the author presents plenty of
outcome based on how prevalent or familiar
real-world examples. It should be kept in mind
the results are in their lives.
that the ambience of the observation of bias is not
e) Self-attribution bias: It refers to the tendency limited to a certain country.
of individuals to attribute their successes to
However, the most interesting thing about this
innate aspects, such as foresight talent, while
book is that it not only raises awareness and
more often blaming failures on external
increases our understanding of behavioral biases,
influences, such as misfortune.
but also helps us find ways to optimize
f) Outcome bias: It is a cognitive and information investment programs with these biases in mind.
processing bias, where investors make
Investors can learn how to adapt their strategies
decisions based on the outcome, not the
and portfolios to these biases so that they can
process that led to the outcome.
adhere to their investment goals and increase the
g) Repetition bias: This is particularly intriguing economic returns of their investments.
because they provide a window on decision
All topics in this book will resonate well with
making outside the laboratory. In real life,
readers who have an interest in the field of
judgments do not occur in discrete and
behavioral finance, but also with readers who
isolated trials with long inter-trial intervals,
have an interest in the practical aspects of the
but within context and are therefore
observations.
potentially biased by past decisions made in
the immediate past. In addition to gaining a fresh perspective,
decision makers and academics, postgraduate
The fourth part of the book clarifies the concept
students will benefit from a comprehensive
of sentimental inclination. This section has seven
review of the available literature in this book on
chapters explaining various types of biases which
behavioral finance research. This book can be
are derived from specific behavior patterns.
used as a textbook as it summarizes each part in a
The fifth part of this book describes the four well versed manner.
behavioral investor types and combines them as
The book itself is useful for understanding
a case study that shows how investors can use
behavioral finance, for building the Best Portfolio
behavioral finance in real-world portfolio
and for all (potential) investors who want to
management.
apply behavioral finance in their asset allocation
Section six of this book concludes with a process and build a better portfolio to achieve
discussion of the tangible effects on portfolio financial goals.

Copyrights @Kalahari Journals Vol. 6 No. 3(December, 2021)

International Journal of Mechanical Engineering
4290