Behavioral Finance: An Innovative Approach to InvestingJoseph S. Grieco

September 28th, 2013

This material is provided for information purposes only and does not constitute an offer to purchase any security or investment or a solicitation of investment advice. An offer of interests in any particular investment can only be made pursuant to the relevant offering documents which contain important information concerning risk factors, performance and other material aspects of the investment and must be carefully read before any decision to invest is made.

2

Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Corporation.

Investment products:

© 2013 Bank of America Corporation. All rights reserved. | [ARM3VLBJ] 

Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value

3

We will cover three main topics:

1. What is behavioral finance?

2. How is behavioral finance meaningful to me?

3. How can behavioral finance impact my investment considerations?

Agenda

What is behavioral finance?

5

Chart source: Westcore Funds / Denver Investment Advisers LLC 1998

The cycle of market emotions

6

Two lines of identical length

7

Can be made to appear different by changing perspective

8

Imagine that you bought $6000 worth of stock from a now bankrupt company. There are two alternatives to recover money…

Would you choose A or B?

Alternative A

• Recover $2000

Alternative B

• 1/3 chance $6000 recovered

• 2/3 nothing recovered

92% go for A

Source: Wang, 1996

Are you a risk taker?

9

Source: Wang, 1996

Alternative A • Recover $2000

Alternative B • 1/3 chance $6000 recovered• 2/3 nothing recovered

92% go for A

Alternative X • Lose $4000

Alternative Y 1/3 chance nothing lost2/3 chance $6000 lost

67% go for X

Would you choose A or B?

Imagine that you bought $6000 worth of stock from a now bankruptcompany. There are two alternatives to recover money…

Would you choose X or Y?

Different perspectives can change risky choice

10

Behavioral finance is the study of human behavior in a financial context, and acknowledges that the human side of investing is critical to investment success.

Traditional Finance Behavioral Finance

What is behavioral finance?

How is behavioral finance meaningful to me?

12

What is your Investment Personality?

13

Choice 2: Flip a coin

• If heads, you receive $0

• If tails, you receive $100

Choice 1: Receive $20 in cash

OR

Forced decision between Choices 1 and 2...

Example: What is your Mindset toward risk?

14

• Participant is brought into a room with other people• In sequence, each person judges line lengths: which is most similar to the target…

A, B, or C?

A TargetB C

Group decision making: Asch Experiment

15

Information sharing

16

Information sharing

17

Information sharing

How can behavioral finance impact my investment considerations?

19

Understanding your own Investment Personality