Behavioral Finance and Wealth Management: How To Build Optimal Portfolios That Account For Investor Bias

Abstract

The human nature always enables in coping with the day to day life by understanding the current situations. There is no cure for human nature, however a clear awareness of the biases will help the individuals to cope up with such bias and avoid in making any pitfalls while managing their wealth. Behavior is all that an individual might do or try. Basically, behavioral finance illuminates the supremacy of economics with the provision of more accurate psychosomatic foundations. Such awider outlook of social science focusing on psychology and sociology appears to be the most fertile ground of research. Its findings often stand in sharp conflict to much of the efficient market hypothesis. The behavioral finance field is far too vast, and it is impossible to cite every known work. Stock market effectiveness requires an understanding of human nature in a collective perspective on top of financial skills. Thus, paving way for the significance of cognitive psychology in the course of making the decision. The focus of the paper is to analyze the key bias factors prompting the individuals in taking decisions to build optimal portfolios. From the analysis it is identified that investor bias is one of the key factors which influences in building optimal portfolios of the investors. The loss aversion and over confidence is considered to be the major factor influencing the wealth management aspects.