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Über dieses Buch

This book looks at financial advisory from a behavioural perspective, and focuses on how the nature of the relationship between advisors and clients may affect the ability of the advisor to perform its functions. Broken into three key parts, the book looks at the client, the advisor, and the relationship between the two. Chapters review relevant theories of decision-making under risk to understand the nature of clients’ decisions. The literature on advisors’ functions and the normative landscape regulating financial advisory are also addressed. Finally, this book reviews how behavioural finance has traditionally addressed portfolio selection and explains how trust can be seen as a viable avenue to maximize advisors’ effectiveness and pursue clients’ needs.

This book will be of interest to both behavioural finance scholars and practitioners interested in understanding what the future of financial advisory may have in stock.



The Investor


1. Understanding Investor Behaviour

This chapter introduces the behavioural underpinnings of decision-making under risk, reviewing the literature from cognitive psychology and economics in order to provide a more empirically founded picture of the investor’s mind. The chapter addresses the two stages of decision-making—information collection and processing, and the actual process of choice—showing behavioural regularities and identifying patterns of behaviour that may be detrimental to financial decision-making. Cruciani reviews the role of heuristics and the resulting biases, spanning from representativeness to overconfidence and discusses their implications in financial context. This chapter also provides an overview of the implications of a seminal behavioural model, prospect theory, and details how related concepts like loss aversion, framing effect, mental accounting impact asset allocation.

Caterina Cruciani

2. Different Views on Economic Rationality: Affect and Emotions

This chapter suggests that the heuristic behaviour that may lead to biases in financial decision-making is not necessarily due to irrationality, but has sound evolutionary roots developed in a time where investments and yields were not a concern, but survival was.This chapter also looks at emotions and personality traits as important elements to understand the investor mind. Emotions are not unstable “visceral factors”, but produce predictable consequences that are key elements in the advisor–client relationship.Cruciani reviews the concept of ecological rationality, through which different tools become more useful according to the specific features of the environment, and shows how fast and frugal trees are able to describe financial decision-making with the same, if not higher, accuracy than more cognitively complex methods.

Caterina Cruciani

The Advisor


3. Financial Advisory: Basic Roles and Functions

This chapter looks at the different roles that advisors play in the client–advisor relationship. Looking at empirical data, the first section of this chapter shows that the main goal of financial advisory—improving financial returns—is not effectively pursued.This chapter looks at the ancillary roles that advisors play, which include information transmission, financial education and biases management. The literature assessing the effectiveness of the different ancillary roles is reviewed. The evidence reviewed suggests that the premium that advisors bring to the relationship with their clients can be found in the support they provide at emotional level. Framing the client–advisor relationship as a fiduciary relationship based on trust allows reconciling the evidence reviewed.

Caterina Cruciani

4. Financial Advisory: Normative Developments and Incentives

This chapter explicitly addresses the role of compensation structures in financial advisory practices in order to understand how the current and planned normative requirements interact with the features of the fiduciary relationship between clients and advisors.A first section described the evolution of the profession of financial advisors in the US and in the EU, with a particular focus on the European regulation (MiFID I and II).Using the lens of behavioural theories and the European example as a case in point, this chapter shows some preliminary evidence regarding potential unintended consequences of regulation aimed at improving consumer protection and transparency that may hamper the effectiveness of the new norms, advocating the need to further study the potential behavioural implications of such normative changes.

Caterina Cruciani

Behavioural Financial Advisory Practice


5. Behavioural Financial Advisory Practice

This chapter addresses how behavioural finance has translated the findings of behavioural sciences regarding human decision-making into financial advisory practices.The different approaches to the existence of biases (eliminating or limiting biases) and their implications are reviewed, looking in particular at the foundations of behavioural portfolio theory and to how it can be translated into specific practices.The chapter also discusses how framing the advisor–client relationship as a fiduciary relationship is consistent with the behavioural approach to portfolio theory. This is due firstly to the fact that the existence of trust allows reducing the information transmission and the resulting possible cognitive overload. Moreover, trust allows for increased delegation, reducing the risk to incur behavioural biases and achieving piece of mind.

Caterina Cruciani


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