How Much is Behavioral Advice Worth

September 3, 2019

Behavioral finance is a powerful tool when used effectively by investors and financial advisers. This article provides a quantitative analysis of behavioral mistakes using a fictional case study of a private family that is making two key behavioral mistakes: loss aversion and mental accounting. The key conclusion of the case study is that making behavioral mistakes causes investors to forgo returns, and this loss of return can be significant. However, if advisers and investors can recognize and correct behavioral mistakes, recouping or avoiding these gains is possible; these losses are not necessary.