Avoiding the Siren Song of Emotions: Notes from the Wealth Management Conference

What do Homer’s Odyssey, Boombustology, and “financialese” have to do with wealth management? Quite a lot, it turns out.

Let’s start with the Odyssey. In his presentation on utilizing behavioral finance in the management of client portfolios at the CFA Institute Wealth Management 2012 conference, Greg B. Davies, global head of behavioral and quantitative investment philosophy at Barclays Wealth, explored the concept of what he called “behavioralizing finance.”

“This is not behavioral finance versus classical finance,” he said. “We don’t believe that classical finance is something that should be thrown away. What we believe is that classical finance has not gone far enough; it has not considered what it truly means to be human. It has not considered certain aspects of our intuitive responses to the investment journey in order to make us better investors.”

Davies argued that there is a fundamental disconnect between helping clients invest for the long term and the fact that we live perpetually in the short term, or what he called “the zone of anxiety,” where we are buffeted financially and emotionally by uncertainty. (See “What Should I Do? Translating Long-Term Trends into Action” published in Compass in October 2011.)

Behavioral finance, he told attendees, “recognizes that decisions are always made in the zone of anxiety, but the end goal is always long term and what we have to do is help the decision maker attain that end goal.” One way to do that is to purchase emotional comfort — even if it comes at a cost. (This is further explained in a recent book Davies coauthored with Arnaud de Servigny titled Behavioral Investment Management: An Efficient Alternative to Modern Portfolio. “Successfully implementing one’s optimal portfolio requires emotional comfort and shying away from risky assets and sitting on cash is one way of acquiring this comfort,” they write. “However . . . it can be a very expensive way of doing so because it means that your portfolio will have dramatically lower risk and return than is optimal.”)

Read the rest here.