COUNCIL OF MICHIGAN FOUNDATIONS 44TH ANNUAL CONFERENCE

COUNCIL OF MICHIGAN FOUNDATIONS 44TH ANNUAL CONFERENCE

Making Group Decisions the Behavioral Finance Way

MICHAEL LIERSCH, PH.D. Head of Behavioral Finance and Goals-Based Consulting Bank of America Merrill Lynch

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WHAT IS BEHAVIORAL FINANCE?

WHAT IS BEHAVIORAL FINANCE? Two lines of identical length

WHAT IS BEHAVIORAL FINANCE? Can be made to appear different by changing perspective

WHAT IS BEHAVIORAL FINANCE? Is there a relationship to market perspectives? Chart source: Westcore Funds / Denver Investment Advisers LLC 1998

WHAT IS BEHAVIORAL FINANCE? Behavioral finance is the study of human behavior in a financial context, and acknowledges that the human side of investing is critical to investment success. Traditional Finance Behavioral Finance

HOW CAN BEHAVIORAL FINANCE BE MEANINGFUL TO US? Tool to elicit investors perspectives on investing and then share perspectives Investment Personality

HOW CAN BEHAVIORAL FINANCE BE MEANINGFUL TO US? Example: What is your group s Mindset toward risk? You just flipped a coin, but you don t know the outcome yet... Would you agree to play the following game again? If the coin flip is......heads, you lose $100...tails, you receive $200 Adapted from Amos Tversky and Eldar Shafir, The Disjunction Effect in Choice Under Uncertainty, Psychological Science, September 1992.

HOW CAN BEHAVIORAL FINANCE BE MEANINGFUL TO US? Understanding your group s Investment Personality

DESERT SURVIVAL: ACTIVITY

DESERT SURVIVAL: SCENARIO It is approximately 10 a.m. in late August. Returning from a recent trip, you and your group are flying over the Sonora Desert in the southwestern United States. You notice that the immediate area is quite flat and, except for occasional cacti, appears to be rather barren. The last weather report indicated the temperature would reach 110 degrees that day. The pilot just indicated that you were approximately 70 miles from a mining camp, which is the nearest known habitation, when the plane begins to experience difficulty. The plane crash lands in the Sonora Desert, burning up and leaving only the air frame. Before the plane caught fire, your group was able to salvage 15 items. You survived the crash, now you must survive the desert.

DESERT SURVIVAL: WHAT YOU SALVAGED IN THE DESERT The following list describes the 15 items you salvaged. Rank your top 3 the items according to their level of importance. Cosmetic Mirror 1 Top Coat per Person 1 Quart (95ml) of Water per Person Flashlight (4-battery size) Parachute (red and white) Jackknife Plastic Raincoat (large size).45 Caliber Pistol (loaded) 1 Pair of Sunglasses per Person Compress Kit with Gauze Magnetic Compass Sectional Air Map of the Area Book "Edible Animals of the Desert 2 Quarts (189ml) of 180 Proof Vodka Bottle of Salt Tablets (1000 tablets)

DESERT SURVIVAL: RANK THE ITEMS YOU SALVAGED IN THE DESERT Your Rank Your Team s Rank Item Experts Rank Your Deviation Mirror Top coats Water Flashlight Parachute Jackknif e Raincoat Pistol Sunglasses Compress Compass Map Book Vodka Salt tablets Team s Deviation

HOW DO WE ENHANCE EFFECTIVE GROUP COMMUNICATION?

WHAT ARE THE BENEFITS? TRADE- OFFS?