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Behavioral finance is cognitive psychology applied to finance, Klontz and Horwitz argue

The article lists four client behaviors it calls ubiquitous and the cognitive biases it says explain them.

At a glance

  1. Klontz is a co-founder of the Financial Psychology Institute and a managing principal at Your Mental Wealth Advisors; Horwitz is an associate professor of practice at Creighton University's Heider College of Business.
  2. The article lists four client behaviors it calls ubiquitous: buying high and selling low, holding a poor investment to avoid regret, selling a winner to experience pride, and refusing to diversify a concentrated position.
  3. The article points to the latest edition of CFP Board's Financial Planning Competency Handbook, which added chapters on financial therapy, behavioral finance, and marriage and family therapy applications to financial planning.

Bradley T. Klontz and Edward J. Horwitz argue in the Journal of Financial Planning that behavioral finance is more accurately described as the application of cognitive psychology to finance. They contend the usual shorthand, psychology applied to finance, points to a wider discipline than the research actually draws on. Klontz is a co-founder of the Financial Psychology Institute and a managing principal at Your Mental Wealth Advisors; Horwitz is an associate professor of practice at Creighton University's Heider College of Business.

The article lists four client behaviors it calls ubiquitous: buying high and selling low, holding a poor investment to avoid regret, selling a winner to experience pride, and refusing to diversify a concentrated position. The tools behavioral finance offers to explain and predict those decisions are cognitive biases, including status quo bias, mental accounting, overconfidence and the disposition effect.

The article points to the latest edition of CFP Board's Financial Planning Competency Handbook, which added chapters on financial therapy, behavioral finance, and marriage and family therapy applications to financial planning. The article's framing suggests identifying which bias is driving a client's decision comes before the portfolio answer. Inertia, mental accounting or regret can produce different resistance to the same recommendation.

Reported by the Practice management desk from Journal of Financial Planning. Published . Corrections

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