MIS 4500 Lecture Notes - Lecture 18: Kurtosis, Mental Accounting, Loss Aversion

• School: University of Manitoba
• Department: Management Info. Systems
• Course: MIS 4500
• Professor: Pourang Irani

Document Summary

Lecture 18: goals-based investing: integrating traditional and behavioral finance. Define portfolio efficiency in terms of client goals instead of relying on traditional measures of return and standard deviation, then create strategies matched to each goal. Investor goals: 1. lifestyle needs, 2. wealth transfers, 3. charitable gifts. Decision framing: slight differences in the way that questions are posed lead to very different answers about people"s preferences. Mental accounting: multiple attitudes about risk; manage risk on goal-by-goal basis; maintaining separate investment accounts, either mentally or in practice, and making decisions differently depending on the nature of the account. Mental accounting: develop strategies that can be aligned w/ investors" separate goals and loss aversion: develop strategies to manage losses accounts. Hold losers too long (disposition effect: recommendations: Goals and preferences should be defined as clearly as possible and supported through risk management, using measures such as probability of breaching goal and potential loss.