Download what do our clients want?

HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
“Everything that can be invented
has been invented.”
Charles H
H. Duell,
Duell
Director of US Patent Office, 1899
“Sensible and responsible women
do not want to vote.”
Harold Evensky, CFP
HELPING IRRATIONAL
CLIENTS MAKE RATIONAL
DECISIONS
Grover Cleveland, 1905
“Who the hell wants to hear actors
talk?”
Harry M. Warner, Warner Bros. Pictures,
1927
Harold Evensky, CFP
WHAT DO
OUR CLIENTS
WANT?
Page 1
Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
THE SOPHISTICATES
HOW DO THEY
PLAN ON
GETTING
THERE?
Leaping tall buildings in a single bound is
nice but can you outperform the S&P index?
THE MASSES
ARE THEY
“RATIONAL”?
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HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
HOW CAN WE
HELP?
Daniel Kahneman
2002 Nobel Prize in
economics for having
integrated insights from
psychological research
into economic science,
especially concerning
human judgment and
decision-making under
uncertainty
Harold Evensky, CFP
IT ALL STARTS
WITH
BEHAVIORAL
FINANCE
IN CLASSICAL FINANCE
PEOPLE ARE
RATIONAL
IN BEHAVIORAL FINANCE
PEOPLE ARE NORMAL
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Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
HEURISTICS
MENTAL SHORTCUTS
OVERCONFIDENCE
COMPARED TO
OTHERS IN THIS
SESSION, ARE YOU:
OVERCONFIDENCE
“I CAN
TIME THE MARKET”
AN ABOVE AVERAGE
ADVISOR?
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Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
FEBRUARY
OVERCONFIDENCE
“I CAN PICK
MANAGERS BETTER
THAN MOST”
APRIL
SEPTEMBER
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Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
THE COST
OF A GOOD IDEA
REPRESENTATIVENESS
T
Terry
Od
Odean’s
’ research
h
When an investor sells a stock
and immediately buys another
IF IT LOOKS
LIKE A………………...
The stock that is sold does better
by 3.5% in the following year
REPRESENTATIVENESS
HHTHTTTHTH
TTTTTTTTTT
REPRESENTATIVENESS
MORNINGSTAR GAVE
THIS FUND...
IT MUST BE GOOD
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Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
AVAILABILITY
AVAILABILITY
DOES WARREN BUFFET
BUY IPO
IPO’S
S OR INSURANCE
COMPANIES?
SALIENCY
SALIENCY
OVERREACT TO NEW
INFORMATION
INVESTING IN THE
HOT PRODUCT
OF THE LAST 10
MINUTES?
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Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
SALIENCY
MENTAL MATHMATICS
NOT TAKING AN UMBRELLA TODAY
BECAUSE IT DIDN’T RAIN YESTERDAY
IS A GOOD WAY TO GET SOAKED
BUYING YESTERDAY’S “HOT”
INVESTEMTN IS ALSO A GOOD WAY TO
GET SOAKED
HOT TECH STOCK - IF
GOVT. SAYS GO
90%
PROTOTYPE GOOD
90%
REGIONAL TEST OK
90%
NATIONAL ROLLOUT
90%
90%
DO YOU INVEST?
66%
MENTAL MATHMATICS
LAST YEAR
YEAR, I MADE
THIS YEAR, I LOST
80%
60%
MENTAL MATHMATICS
10 TOSSES
100 TOSSES
MENTAL MATH
AHEAD 20%
THEREFORE I’M
REALITY
BEHIND 28%
8 HEADS
70 HEADS
SAMPLE SIZE
CASE DATA vs. BASE DATA
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HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
MENTAL MATHMATICS
CASE DATA vs. BASE DATA
MY FRIEND MADE MONEY!!
……..MAKET TIMING
……..DAY--TRADING
……..DAY
FRAMING
Harold Evensky, CFP
IMPLICATIONS FOR
PLANNERS
Reality – Investors are subject to
bounded rationality.
Strategy – Recognize the bounds of
experience,
experience logic and authority and the
use of mental frames
APRIL
THE WAY A QUESTION
IS FRAMED,
DETERMINES THE
OUTCOME
Page 9
Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
SEPTEMBER
FRAMING
Which would you
rather have?
‘10% fat’ or
‘90% fat-free’
f tf
’
WOULD YOU RATHER BUY PRUNES
OR
Page 10
Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
WOULD
YOU BUY
THAT
STOCK
TODAY?
FRAMING
THE MINUTE I GET
INTO THE MARKET,
IT WILL GO DOWN
20%
FRAMING
NAME THE TOP 10
BASEBALL PLAYERS
PAINTERS
MOVIE ACTORS
DRESS DESIGNERS
MONEY MANAGERS
FRAMING
CONTAGEOUS
ENTHUSIASM
WHAT COULD GO
WRONG?
Page 11
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
Harold Evensky, CFP
FRAMING
> IF YOU ARE RIGHT, YOU’LL
MAKE A HANDSOME PROFIT.
> IF YOU ARE WRONG, YOU’LL
NEED TO WORK 3 MORE
YEARS.
MANAGING UNREALISTIC
EXPECTATIONS
MANAGE
EXPECTATIONS
IMPLICATIONS FOR PLANNERS
Reality – What is forecast does not
happen. What happens is not forecast.
forecast.
Strategy – Manage expectations –
Monte Carlo simulations, standard
deviation of anthrax
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HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
Harold Evensky, CFP
FALSE
CONFIDENCE
COMPLEMENTARY
ANALYITICS
Sensitivity Analysis
What if Scenarios
What-if
Page 13
Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
Sensitivity
Analysis
Year 1 – 2 STD
What-If
Scenario Planning
Year 2 – 1 STD
IMPLICATIONS FOR PLANNERS
Reality – Investors are loss averse not
risk averse
Strategy – Risk tolerance
questionnaires becomes - Behavioral
based risk coaching
Page 14
Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
IMPLICATIONS FOR PLANNERS
Reality - Intuition is fragile.
fragile Basic
investment and statistical principles
are not learned from everyday
experience.
Strategy –Education
SHARPE
& CAPM
UNSYSTEMATIC
RISK
Business
Financial
Risk
Risk
Market
Risk
SYSTEMATIC
RISK
Interest
Purchasing Rate
Risk
Power Risk
7
MARKOWITZ
6
&5 MPT
4
3
2
1
0
Investment A
Investment B
Portfolio (equal weightings of A & B)
Page 15
Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
Return
BRINSON,
HOOD &
BEBOWER
Anchoring
A
h i
on the
Efficient
Frontier
94%
Market Timing
Security Selection
Risk
Asset Allocation
IMPLICATIONS FOR PLANNERS
Reality – The financial decisions of
real investors are often wrong due to
behavioral factors.
factors.
Strategy – Implement a structured and
di i li d d
disciplined
decision
i i process ––
Investment policies, behavioral based
performance reports
POLICY
34% FIXED
MMA
SHORT
INTER
2%
18%
14%
ROR 5.0% RISK
14.0%
CORE
CORE-CORE
32%
LARGE/MID VALUE
5%
SMALL CAP VALUE
7%
INTERNATIONAL DEV
10%
SATELLITE
EMERGING MARKETS 4%
COMMODITIES
4%
SPECIAL
4%
Page 16
Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
MELANA SCANTLIN & JOE AVERAGE
ASSETS UNDER MANAGEMENT
QUARTERLY REVIEW AS OF October 31, 2003
ADVISED BY MICHAEL ANDERSON
10.0%
Current Allocation
8.0%
6.0%
4.0%
2.0%
20.1%
0.0%
53.2%
Quarter
One Year
Three Year (Ann)
M l
Melana
S
Scantlin
li & J
Joe A
Average
Asset Growth
Initial Investment
Net Inflows
Ending Investment
Portfolio Change
Returns
Percent Growth
CPI
Inception (Ann)
3 1%
3.1%
CPI
Quarter
$2,176,863
$8,877
$2,320,383
$134,643
One Year
$2,078,729
$61,345
$2,320,383
$180,309
Three Year
N/A
N/A
N/A
N/A
Quarter
2.87%
0.98%
One Year
8.46%
2.40%
Three Year (Ann)
N/A
2.15%
6.3%
Inception
$2,424,127
($296,365)
$2,320,383
$192,622
Inception (Ann)
7.07%
2.41%
7.3%
1.2% 3.8% 5.1%
MONEY MARKET
FIXED INCOME
LARGE CORE
LARGE VALUE
SMALL VALUE
INT'L DEVELOPED
SMALL GROWTH
EMERGING MARKETS
TACTICAL
OTHER
Proposed Allocation
Portfolio -vs- CPI
REMEMBER WHAT
IT’S ALL ABOUT
Growth of $10,000 Since Inception
$11,000
$10,800
23.0%
48.0%
$10,600
3.0%
$10,400
7.0%
$10,200
8.0%
$10,000
$9,800
7/31/2002
2.0%
10/31/2002
1/31/2003
Portfolio
4/30/2003
7/31/2003
3.0%
3.0%
3.0%
10/31/2003
CPI
Report Generated on December 2, 2003
Page 17
Harold Evensky, CFP
HELPING IRRATIONAL CLIENTS MAKE
RATIONAL DECISIONS
Harold Evensky, CFP
President
Page 18