New Behavioral Finance Findings and Optimal Asset Allocation (AdvisorOne)

That investors will react more to financial market losses than gains is a well-known behavioral finance theory that’s become increasingly important in this volatile economy. Enrico De Giorgi, professor in the School of Economics and Political Science at the University of St. Gallen in Switzerland and founding partner at Zurich-based firm Behavioural Finance Solutions, recently published a paper about it: “A Behavioral Explanation of the Asset Allocation Puzzle.”

His research has found that individual investors also have subjective mental markers that help them determine where their losses end and their gains begin. Financial advisors who can figure out their clients’ individual markers will go a long way toward understanding loss aversion and coming up with the optimal asset allocation for an individual.