IMCA Publication Offers In-Depth Behavioral Finance Analysis

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Supposed “risk tolerant” investors in 2007 dumped equities—and their advisors—in 2008 and 2009, exposing shortcomings in risk questionnaires, according to a recent publication by Investment Management Consultants Association® (IMCA®). The article by Carrie H. Pan, PhD, and Meir Statman, PhD, in the Journal of Investment Consulting, argues that typical risk questionnaires are deficient for five reasons. The authors go on to present questions that can be used as the foundation for a new kind of questionnaire that probes for propensities such as overconfidence, regret, and life-satisfaction

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During this time of uncertainty and volatility, understanding how investors think and what drives decisions is an increasingly important topic.

Supposed “risk tolerant” investors in 2007 dumped equities—and their advisors—in 2008 and 2009, exposing shortcomings in risk questionnaires, according to a recent publication by Investment Management Consultants Association® (IMCA®). The article by Carrie H. Pan, PhD, and Meir Statman, PhD, in the Journal of Investment Consulting, argues that typical risk questionnaires are deficient for five reasons. The authors go on to present questions that can be used as the foundation for a new kind of questionnaire that probes for propensities such as overconfidence, regret, and life-satisfaction.

Other articles in the latest Journal of Investment Consulting, a semi-annual, peer-reviewed publication focused on the needs of investment advisors and wealth managers, include:

  •     Masters series interview, “The Human Side of Decision Making,” featuring an in-depth conversation with Daniel Kahneman, considered one of the most influential psychologists in the world. Kahneman’s work with his long-time collaborator Amos Tversky helped lay the foundation for behavioral economics, and he shares his insight into the rationality of decision-making.
  •     “Does the Stock Market’s Equity Risk Premium Respond to Consumer Confidence or Is It the Other Way Around?” Risk aversion among stock investors has moved to a permanently higher range in the wake of 2007‒2009 events, according to analysts and financial industry experts. This research closely examines the history of the U.S. stock market risk premium, the relationship between risk premium and consumer confidence, and other factors.
  •     “What Matters in International Equity Diversification” notes that advisors have renewed efforts to urge clients to increase allocations to international markets, though the events of 2008 continue to undercut the message. Research continues to affirm the benefits of international diversification in the long run—even when the crisis is taken into account.

“During this time of uncertainty and volatility, understanding how investors think and what drives decisions is an increasingly important topic,” said Margaret M. Towle, PhD, IMCA’s treasurer and Journal of Investment Consulting editor-in-chief. “The latest Journal of Investment Consulting offers a detailed look at behavioral economics issues that can help advisors guide their clients through any financial storm. IMCA members and anyone who offers financial advice to clients will benefit from reading this publication.”

Visit http://www.IMCA.org for more information.

Established in 1985, IMCA is a nonprofit professional association and credentialing organization with more than 8,700 individual members. IMCA members collectively manage more than $1.6 trillion on behalf of 1.3 million clients, providing investment consulting and wealth management services to individual and institutional clients. Since 1988, IMCA has offered the CIMA® certification, which earned accreditation by the American National Standards Institute (ANSI) in April 2011, making it the first financial services credential in the United States to meet international standards (ISO 17024) for personnel certification. IMCA’s Certified Private Wealth Advisor® (CPWA®) certification is suited for wealth management professionals working with high-net-worth clients. In 2011, IMCA conferences and workshops hosted more than 4,000 attendees.

IMCA® and Investment Management Consultants Association® are registered trademarks of Investment Management Consultants Association Inc. CIMA®, Certified Investment Management Analyst®, CIMC®, CPWA®, and Certified Private Wealth Advisor® are registered certification marks of Investment Management Consultants Association Inc. Investment Management Consultants Association Inc. does not discriminate in educational opportunities or practices on the basis of race, color, religion, gender, national origin, age, disability, or any other characteristic protected by law.

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Ryan Hoffman
Investment Management Consultants Association
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