Innovations in Behavioral Finance: How to Assess Your Investment Personality

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1 Innovations in Behavioral Finance: How to Assess Your Personality FALL 2014 Michael Liersch, Director Anil Suri, CIO, Multi-Asset Class Modeled Solutions How can an investor avoid costly reactions to the ups and downs in financial markets? Behavioral finance suggests a solution: An investor can embrace rather than reject personal and emotional needs. By better understanding the make-up of her unique Personality, an investor can enhance the opportunity to make decisions that are right for her. Are you a bull or a bear? Not sure? Well, you are not alone. Individual investors six-month forward looking view on markets started 2011 on an optimistic note, with 56% of investors identifying themselves as bulls, and only 18% as bears. 1 However, sentiment quickly turned negative, with bears dominating bulls by mid-march, corresponding with the Japanese earthquake, tsunami, and subsequent Fukushima nuclear power plant crisis. From that point on, bull/bear dominance flipped not once or twice, but nine more times through the end of 2011 (see Exhibit 1). Exhibit 1: Bull/Bear market sentiment American investors view on future stock market performance in 2011 (6-month forward looking view) Percentage of Bullish/Bearish Investors 60% 50% 40% 30% 20% 10% 0% Bullish Bearish Source: The American Association of Individual Investors (AAII) Dec Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Importantly, bullish or bearish sentiment can define an investor s strategy: Bears may attempt to profit from falling markets, whereas bulls may attempt to benefit from rising markets. 2 Without a clear forward-looking view, what is an investor to do? Behavioral finance, the study of how investors make real investment decisions, can help: Rather than KEY IMPLICATIONS Understanding one s Personality the investor s Mindset toward risk, her Approach to building an investment strategy, and her Purpose for investing can help the investor and her Financial Advisor tailor a unique, and comprehensive, financial strategy best suited to achieving her goals. Mindset The investor s comfort with, and willingness to take, investment risk. Approach The elements, or solutions, that can be included in an investment strategy to help the investor stay invested. Purpose The reasons that the investor is investing, and whom she would like to benefit from her investment dollars. By making the investor rather than markets or investments the focal point of the investment conversation, the Financial Advisor and the investor may be able to enhance investment outcomes. 1 The rest were neutral. Poll numbers are taken from the American Association of Individual Investors (AAII) weekly sentiment survey of individual investors. 2 Jason Zweig, If It Looks Like a Bear The Wall Street Journal, October 8, Merrill Lynch makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S) and other subsidiaries of Bank of America Corporation BofA Corp. products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value MLPF&S is a registered broker-dealer, Member SIPC and a wholly owned subsidiary of BofA Corp Bank of America Corporation. All rights reserved.

2 Exhibit 2: Tracking the cycle of market emotions POINT OF MAXIMUM FINANCIAL RISK WOW, I FEEL GREAT ABOUT THIS INVESTMENT EXCITEMENT OPTIMISM THRILL EUPHORIA ANXIETY DENIAL FEAR DESPERATION POINT OF MAXIMUM FINANCIAL OPPORTUNITY OPTIMISM PANIC RELIEF CAPITULATION HOPE MAYBE THE MARKETS JUST AREN T FOR ME DESPONDENCY DEPRESSION Source: Westcore Funds/Denver Advisors LLC 1998 focus on markets, the investor can shift focus to an alternative that is much more in her control investing according to her personality and goals. The Cost of Shifting Sentiment Once an investor understands who she is as an investor, she can better articulate her goals. By investing to goals, rather than to markets, an investor can make decisions based on progress to her goals, and may avoid costly choices resulting from rapidly shifting sentiment. Past studies have attempted to pinpoint the precise cost of investment decision-making errors like market mistiming and excessive trading activity. Some research shows that U.S. equity investors forgo anywhere from 2 percentage points 3 to over 5 percentage points 4 in annual returns due to poor investment decisions. A study examining equity investors in Taiwan uncovered similar costs of human behavior, suggesting that nearly 4 percentage points in returns are sacrificed per year. 5 In yet another study, investors in U.K. equity mutual funds were shown to miss out more modestly, with just over 1 percentage point in annual underperformance. 6 To put these forgone returns in perspective, the median U.K. investor whose behavior appears to be least costly saw underperformance of 20% over the period of 1992 to Imagine how much more portfolio value is diminished at 2, 4 or 5 percent in lost annual returns. Some changes in sentiment are based on careful evaluation of information or events. When grounded in pre-defined analytical criteria, such shifts can be useful: An investor can tactically tilt her investment strategy on a monthly, quarterly or even annual basis in a structured, but dynamic, way. However, other changes in sentiment may be less evaluative and more emotional especially when reacting to ups and downs in markets (see Exhibit 2). 7 For example, as markets rise an investor may become increasingly optimistic. Optimism can quickly shift to euphoria, leading the investor to remain bullish, and buy even though market fundamentals do not support a buy decision. On the opposite side of the spectrum, falling markets may enhance an investor s fears. An increasingly bearish investor may capitulate, moving to more conservative strategies or exiting 3 Brad Barber and Terrance Odean, Trading Is Hazardous to Your Wealth: The Common Stock Performance of Individual Investors, Journal of Finance, Vol. 55, See also, Brad Barber and Terrance Odean, Boys Will Be Boys: Gender, Overconfidence, and Common Stock, Quarterly Journal of Economics, Vol. 116, DALBAR, Investors Can Manage Psyche to Capture Alpha, April 1, Brad Barber, Yi-Tsung Lee, Yu-Jane Liu and Terrance Odean, Just How Much Do Individual Investors Lose by Trading? The Review of Financial Studies, Vol. 22, No. 2, Andrew Clare and Nick Motson, Do U.K. Retail Investors Buy at the Top and Sell at the Bottom? September To gain a Nobel laureate s perspective on evaluative ( System 2 ) vs. impulsive ( System 1 ) decision-making, see Daniel Kahneman, Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, Innovations in Behavioral Finance: How to Assess Your Personality 2

3 the markets altogether even though data suggest markets are inexpensive. 8 Indeed, the notion that investors are acting on emotion-based market sentiment has gained significant traction, most recently with the well publicized launch of a hedge fund in the summer of 2011 that bases its strategy on emotion-laden words posted on social-networking sites such as Twitter. 9 Behavioral Solutions If you were a robot-like investor with an infinite time horizon, markets may have seemed uneventful in 2011: the S&P 500 was essentially flat for the year. But think back to August 8 of that year. U.S. debt had just been downgraded and the S&P 500 had dropped nearly 17% since July 22. Now remember the month of October, when the S&P was up nearly 17% from October 3 through 28 only to drop 10% by November 25. Given such dramatic swings, it is not difficult to imagine going from capitulation to euphoria to capitulation again in a matter of months especially because investors are not robots, and do not have infinite time horizons. Exhibit 3: Is the glass half empty or half full? Half empty: Investors should take their humanity out of the investment equation, and become a robot-like investor, to avoid making costly mistakes. } } Half full: There is ample opportunity to acknowledge one s own Personality, and invest accordingly, which may enhance returns. Of course, investors have both short and long term needs, expectations and aspirations. As a consequence, reacting to markets, and others perceptions of those markets, is part of human nature. Even Harry Markowitz, who established Modern Portfolio Theory a Nobel Prize winning analytical framework to optimize risk-return trade-offs acknowledges that he himself could not always stick with pure analytics when investing: Instead, I visualized my grief if the stock market went way up and I wasn t in it or if it went way down and I was completely in it. My intention was to minimize my future regret. So I split my contributions 50/50 between bonds and equities. 10 But are human needs something that investors like Markowitz should try to avoid? Maybe not. Rather than seeing the glass as half empty, there may be a benefit from seeing the glass as half full: By better understanding your unique behavioral tendencies as an investor, there is an opportunity to invest in a way that may enhance your returns. Otherwise put, an investor may benefit from complementing financial analytics with a framework for understanding her own behavior. Many of the best Financial Advisors already collaborate with their clients to do just that: Even though they may have already established an analytical approach to investing, clients and their Financial Advisors have been shown to understand the importance of connecting with one another during challenging market times to try to make better investment decisions. 11 Indeed, investors have the opportunity to seek Financial Advisors that are not only investment, but investor, managers 12 : Rather than thinking of the human side of investing (e.g., emotions) as something that should be ignored, investors and Financial Advisors can work together to incorporate the investor s unique Personality into an investment strategy which can help investors stay the course during their investment journey, and make them more likely to achieve the outcomes they desire. 13 Your Personality When an investor and her Financial Advisor understand how market swings and shifts in portfolio value might influence the investor s decision-making before an investment strategy is put in place, there is an opportunity to invest in a way that will help achieve the investor s goals. Rather than a market view or investment solution, the starting point of the investment process becomes the investor s Personality which can help the investor and Financial Advisor anticipate the investment journey so that the right strategy can be identified. 8 For a study evaluating the relationship between sentiment and past market performance, see Gregory Brown and Michael Cliff, Investor Sentiment and Near-Term Stock Market, Journal of Empirical Finance, Vol. 11, No. 4, September Jack Jordan, Hedge Fund Will Track Twitter to Predict Stock Moves, Bloomberg, December 22, Jason Zweig, Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich. New York: Simon & Schuster, For Harry Markowitz s views on incorporating behavioral finance and traditional investment analytics, see Meir Statman, Best of Both Worlds: Integrating Behavioral Finance and Modern Portfolio Theory, Merrill Lynch Wealth Management Institute, Fall Philip Maymin and Gregg Fisher, Preventing Emotional Investing: An Added Value of an Advisor, Journal of Wealth Management, Vol. 13, No. 4, Spring Meir Statman, How Important Is Asset Allocation? Journal of Asset Management, Vol. 2, Michael Liersch, What Is Behavioral Investing? Merrill Lynch Wealth Management Institute, Fall Innovations in Behavioral Finance: How to Assess Your Personality 3

4 At least three primary components are important to identifying an investor s Personality: the investor s Mindset, Approach, and Purpose (see Exhibit 4). Exhibit 4: Merrill Lynch s science-based approach to understanding your Personality Mindset CONFIDENCE ADAPTABILITY EXPERIENCE Approach ACCESSIBILITY $ PROTECTION ACTIVITY Purpose SELF FAMILY COMMUNITY Mindset Imagine that you were given the following choice: You could receive $200,000 for sure, or you could flip a coin that would yield $400,000 if the coin lands heads and $100,000 if the coin lands tails. Based purely in analytics, one might choose the risky option because the coin-flip s expected value is $250,000, which is higher than the certain $200,000. But many human beings might be willing to forgo the extra $50,000 in expected value in favor of the sure thing. 14 Understanding an investor s comfort with various market risks, and her belief that the markets are worth those risks, makes up an investor s Mindset. Assessing an investor s Mindset can help determine the right portfolio risk level, asset class exposure, and her desired level of investment complexity. For example, if the investor has lower confidence in the markets which may be a consequence of events since the 2008 financial crisis 15 then she could simply invest more conservatively. Alternatively, if the investor needs to take on more risk to meet her goals and has the financial capacity to do so, comfort with risk can be enhanced by dollar-cost averaging, or gradually placing money into the right investment strategy over time. An investor s perceived adaptability to changing market environments and investment outcomes may also impact the risks that she would like to take. Although research suggests that most people are quite capable of adapting, many feel that they cannot. 16 Someone who believes she has a low capacity to adapt may have a tendency to stay in cash or overly conservative investments. To increase comfort with taking risk, however, the investor could consider less volatile asset classes (or eliminate more volatile exposures altogether) and focus on strategies that deemphasize moment-to-moment market returns (e.g., high-quality yield or income-based strategies). Finally, when it comes to an investor s Mindset, experience can matter. 17 For example, less experienced investors may incorrectly perceive more complex, unfamiliar investments as risky (e.g., corporate bonds), and more simple, familiar investments as riskfree (e.g., U.S. treasuries). 18 Openly acknowledging an investor s familiarity with markets and with investing can help bring the investor and her Financial Advisor to a mutual understanding around the right levels of risk and complexity. Approach Nobel laureate Daniel Kahneman and his co-author Amos Tversky helped scientifically establish that losses hurt much more than equivalent gains feel good. 19 To make things more concrete: most investors need to earn much more than $100,000 to make up emotionally for a $100,000 loss. Research tends to converge on the notion that for the average person, losses hurt two times more than the equivalent gain feels good. 20 And there is evidence that for older investors, they are far more even hyper loss averse. 21 The investment journey with which the investor is most 14 For a behavioral theory of risk aversion, see Daniel Kahneman and Amos Tversky, Prospect Theory: An Analysis of Decision under Risk, Econometrica, Vol. 47, No. 2, March The expected value calculations in this section were derived as follows: On average, the coin flip will yield heads half of the time, an expected value of $200,000, or.5 * $400,000. The other half of the time, the coin will land tails, an expected value of $50,000, or.5 * $100,000. As a consequence, the total expected value is $250,000, or $200,000 + $50, Lisa Shalett, Another Look at Market Psychology: Reviving the Equity Culture, IMG Insights, July David Schkade and Daniel Kahneman, Does Living in California Make People Happy? A Focusing Illusion in Judgments of Life Satisfaction, Psychological Science, Vol. 9, No. 5, For a review of studies examining how experience may eliminate differences in investment behavior previously attributed to gender, see Rachel Croson and Uri Gneezy, Gender Differences in Preferences, Journal of Economic Literature, Vol. 47, No. 2, June There is also evidence that people see risk and benefit as negatively correlated: Ali Siddiq Alhakami and Paul Slovic, A Psychological Study of the Inverse Relationship between Perceived Risk and Perceived Benefit, Risk Analysis, Vol. 15, No. 6, December Amos Tversky and Daniel Kahneman, Advances in Prospect Theory: Cumulative Representation of Uncertainty, Journal of Risk and Uncertainty, Vol. 5, Richard Thaler, The End of Behavioral Finance, CFA Institute, November/December AARP and American Council of Life Insurers (ACLI). What Now? How Retirees Manage Money to Make It Last through Retirement. Report of Findings, Innovations in Behavioral Finance: How to Assess Your Personality 4

5 comfortable especially with regard to potential losses can help define the solutions that determine the investor s Approach. Once invested, some investors who experience losses can become anxious, panicking during volatile markets because they feel out of control. Understanding the investor s desire to feel in control during out-of-control times can help identify the investor s desired level of accessibility to her investment dollars. Greater accessibility can reduce the potential for higher returns, but can reassure the investor that she can deviate from her investment strategy at any time which may, ironically, make her less likely to do so. 22 Even if she chooses to deviate, higher accessibility solutions (e.g., more liquid securities) may make shifts to her investment strategy less costly relative to less accessible solutions (e.g., less liquid securities). Explicit protection of investments can be expensive, but can also increase comfort with an investment strategy by mitigating losses, enabling the investor to stay the course. This can be done in more moderate ways, using solutions that attempt to limit downside potential via diversification, option strategies or alternatives (e.g., hedge funds). Annuities or principally protected market-linked investments can offer higher levels of protection by explicitly preserving investment principal, although such guarantees can come at a high cost (and are not without risk). Ultimately, one of the most important aspects of an investor s Approach is her desired level of investment activity: Those expressing a desire to be less active may be most interested in offloading financial decision-making to a Financial Advisor or other investment professionals (e.g., money managers). At the extreme, investors who want the least level of activity may not even be interested in making any investment decisions after a strategy is set. Purpose An investor may choose not to invest for a variety of reasons whether spending seems more appealing, the timing feels off, or the potential of investment losses looms large. But how would she feel about committing to invest via a pre-defined investment strategy? For example, the investor might create a plan and invest a certain amount of money over several years toward it to achieve her goals. Indeed, such pre-commitment moves many investors to invest significantly more. 23 Thinking beyond present needs can help investors to invest, and stay invested. Why? The investor has invested according to her Purpose, articulating the reason why she needs or wants to invest and for whom she invests. Arguably one of the most critical elements of investment success is to have an investor and her Financial Advisor collaborate to understand how much, and in what way, the investor would like to accumulate or spend her investment dollars and what methods can make this accumulation or spending most efficient (e.g., via tax- advantaged strategies). 24 Such self considerations can often be overlooked, especially when an investor assigns a higher importance level to the needs of her familiy or community. However, a low emphasis on self can lead to a number of investment issues. For example, investors can accumulate money too slowly, or decumulate it too quickly, both of which may lead to poor outcomes for all. An investor can consider family to be the primary Purpose for investing. While she may have insured herself against longevity risks, invested for her children s education or established trusts, she may not have accounted for other important elements of investing for her family. For example, the investor may not have explicitly addressed her children s own level of investment knowledge or discussed the differences in family members Personalities (e.g., comfort with risk). 25 Investing as a family can help address these needs: an investor can set up investment accounts for her children and they can manage those accounts together, or a family foundation can enable the family to invest and give together. Investing for the community is a major focus for many investors in the U.S. 26 Indeed, there is evidence that giving not only benefits others, but can increase the well-being of the giver. 27 Understanding what is important to an investor can 22 For a discussion of ironic processes in mental control, see Daniel Wegner, Ironic Processes of Mental Control, Psychological Review, Vol. 101, No. 1, January Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth and Happiness. New Haven: Yale University Press, Jean Brunel, Goals-Based Wealth Management in Practice, The Journal of Wealth Management, Vol. 14, No. 3, Winter For suggestions on reaching younger generations about investing, see Michael Liersch, What Behavioral Finance Has to Say about Generations X, Y and Z, Merrill Lynch Wealth Management Institute, Spring See also Meir Statman, Behavioral Finance Can Bring Generations Together, Merrill Lynch Wealth Management Institute, Spring Still, average charitable giving by high net worth households in the U.S. decreased by about 35% during the recession years 2007 to 2009; The 2010 Study of High Net Worth Philanthropy, Bank of America Merrill Lynch and the Center on Philanthropy at Indiana University, November Elizabeth Dunn, Lara Aknin and Michael Norton, Spending Money on Others Promotes Happiness, Science, Vol. 319, No. 5870, March Innovations in Behavioral Finance: How to Assess Your Personality 5

6 help structure the right philanthropic strategy whether as an individual, as a family, or as a bequest that yields the greatest benefits to all. And like investing, giving comes with expectations and risks, which should be openly addressed when the investor enters into a philanthropic endeavor. Personality in Action: An Entrepreneur An entrepreneur can be of the Mindset that she is willing to take high levels of market risk, leading to her business success. Appetite for risk can be reflected in her Personality: She has a high degree of confidence that investing can yield positive returns, and she believes that she can adapt to any short-run changes in order to reap long-run rewards (see Exhibit 5). However, because she has focused on her own business, the entrepreneur recognizes that entrepreneurship can be much different than investing in a well-diversified portfolio, leading her to acknowledge that her investment experience is low. Exhibit 5: An Entrepreneur Mindset Approach CONFIDENCE ACCESSIBILITY Purpose SELF If high levels of portfolio risk are taken without commensurate measures to protect her portfolio adequately, the entrepreneur may exit her investment strategy at exactly the wrong time when losses are experienced (i.e., she may sell low). This is especially true due to her high focus on self, and her own need for income, as her primary investment Purpose. By understanding this potential tendency, the entrepreneur can work with her Financial Advisor to develop the right strategy whether through high-quality yield-based strategies, principally protected market-linked investments, alternatives that attempt to capture less of the downside, or by simply lowering the portfolio s risk level through more conservative investments or diversification. The Entrepreneur and Her Significant Other People who make investment decisions or experience investment outcomes jointly i.e., couples, families, boards or investment committees can underestimate the power of knowing one another s perspective on investing. Indeed, there is evidence that people believe that others share their own viewpoints more than they actually do. 28 To this end, it can be critical for an investor to be aware not only of their own, but of affiliated investors Personalities, too. ADAPTABILITY PROTECTION FAMILY For example, consider the same entrepreneur, who is now investing with her significant other. As can be seen in Exhibit 6, her significant other has a much more conservative EXPERIENCE ACTIVITY COMMUNITY Low Moderate High Exhibit 6: A Couple (An Entrepreneur/Her Significant Other) Mindset CONFIDENCE Approach ACCESSIBILITY Purpose SELF Indeed, unlike business ownership where much about the business endeavor is in the entrepreneur s control much about market value is out of an investor s control. Consequently, the entrepreneur-turned-investor may attempt to control investment performance by desiring to have high levels of accessibility to her investment dollars, high protection against loss, and active engagement in day-to-day investment decision making. Critically, with a higher degree of risk comes the potential for greater loss. So her risk-seeking Mindset may be at odds with her loss-averse Approach. ADAPTABILITY EXPERIENCE Spouse 1: PROTECTION ACTIVITY High Spouse 2: Moderate Low FAMILY COMMUNITY High Moderate Low 28 Nicholas Epley, Boaz Keysar, Leaf Van Boven and Thomas Gilovich, Perspective Taking as Egocentric Anchoring and Adjustment, Journal of Personality and Social Psychology, Vol. 87, No. 3, September Innovations in Behavioral Finance: How to Assess Your Personality 6

7 Mindset, with both a lower confidence in markets and a lower perceived ability to adapt to a changing market environment or investment outcome. However, the entrepreneur s significant other has more investment experience, which may lead to an interesting dynamic: If a high degree of risk is taken, the entrepreneur s significant other may experience extreme levels of anxiety and discomfort during challenging investment periods. This discomfort could be exacerbated by the entrepreneur s desire to be heavily involved in the investment decision-making, despite her lower level of experience. This may be why the entrepreneur s significant other would prefer to be less active: the significant other may desire to have a Financial Advisor or another investment professional, rather than the entrepreneur, guide or take control of investment decisions. How can this potential conflict be resolved? There are a number of possibilities, from simple awareness, to negotiating a portfolio risk level with which both members of the couple are comfortable, to creating two sub-portfolios one in line with the entrepreneur s Personality and the other consistent with her significant other s. It is also important to note that in this situation, the couple shares the same Purpose. However, couples can have differences in Purpose (e.g., community), which can be explicitly addressed in their investment strategy (e.g., carving out money for a foundation). 29 Final Comments Understanding an individual s Personality, whether the investor is a part of a couple, single, or on the board of a foundation, involves identifying the unique traits that make her tick. What are her goals? Her priorities? Her values? Her fears? By applying that understanding toward tailoring a comprehensive financial strategy, the investor and her Financial Advisor are poised to achieve desired outcomes consistent with the investor s unique Mindset, Approach and Purpose in investing. Actions to Take Now Once an investor has thought about her Personality her Mindset toward risk, her Approach to building an investment strategy, and her Purpose for investing what can she do now? The investor can collaborate with a trusted Advisor to: Incorporate Personality. Ensuring that an investor s behavioral needs are addressed may increase her level of comfort with a pre-defined investment strategy, or Policy Statement. Articulate goals, and invest accordingly. When an investor knows her Purpose, she can better articulate her goals and set an appropriate strategy. For example, the investor may want to generate income for herself and preserve wealth for a bequest to her children both of which may necessitate distinct investment solutions. Systematically monitor progress to goals. Managing an investment strategy to personal and financial aspirations, rather than to expected returns, may make an investor more likely to stay the course and achieve her desired investment outcomes. Furthermore, establishing semi-annual or annual reviews of progress to goals can focus investment decision-making on the big picture. Consider a dynamic asset allocation. An investor whose Mindset reflects high levels of experience, adaptability, and confidence may resist a strategic approach to investing, instead focusing on markets and investment ideas. Dynamic asset allocation where pre-established rules guide small, but important, shifts in an overall strategy can increase these investors willingness to establish a more structured investment solution. Discuss investing across generations. Sharing the concept of Personality can generate valuable conversations across generations about levels of financial knowledge, comfort with risk or loss, and why each individual is investing. 29 Recent research suggest there are large differences in couples preferences around philanthropy; The 2011 Study of High Net Worth Women s Philanthropy, Bank of America Merrill Lynch and the Center on Philanthropy at Indiana University, December Innovations in Behavioral Finance: How to Assess Your Personality 7

8 Michael Liersch, head of Behavioral Finance, is a member of the Client Segments and Advisor Development team at Merrill Lynch Wealth Management. He leads the behavioral finance initiative, which is focused on tailoring investment advice to meet the needs of a client s unique investment personality in the context of their investment goals. Prior to joining Merrill Lynch, Michael led the behavioral finance initiative at Barclays Wealth for North and South America. He has also previously held the positions of Director of Research at Behavioral Research Associates, Consultant at Deloitte Consulting and Visiting Professor at New York University s Stern School of Business. Michael s research has been published in top psychology journals including Psychological Science and Journal of Marketing Research. His perspectives have been highlighted in investment media outlets including Bloomberg TV, CNBC, The Wall Street Journal, USA Today, On Wall Street and FundFire. Michael earned a Ph.D. from the University of California, San Diego in Cognitive Psychology. He also holds an A.B. in Economics from Harvard University. Anil Suri, Managing Director, is the CIO of Multi-Asset Class Modeled Solutions and the Head of Analytics at Merrill Lynch Global Wealth Management. He leads the development of solutions for goals-based wealth management, retirement investing, behavioral finance, asset allocation, systematic portfolio management, and performance measurement across traditional, market-linked and alternative investments. Anil has been with Merrill Lynch since 2004, where he was previously Head of Strategy & Analytics in the Alternative s area and a Senior Strategist on the Merrill Lynch Research Committee (RIC). Anil s research has been published in the Journal of Wealth Management and discussed in Barron s and The Wall Street Journal. His prior experience includes roles as a senior AI strategist at Citigroup, trader at Credit Suisse and management consultant at McKinsey. Anil earned an M.B.A. with honors from the Wharton School of the University of Pennsylvania, an M.S.E. (operations research and financial engineering) from Princeton University and a B. Tech. from the Indian Institute of Technology at Delhi. Innovations in Behavioral Finance: How to Assess Your Personality 8

9 Merrill Lynch s Wealth Management Institute offers clients some of the world s best intellectual capital on topics that complement our traditional investment management and portfolio construction advice. The Wealth Management Institute helps clients and advisors create holistic and customized solutions by combining Merrill Lynch s expertise in managing wealth for individuals, families and institutions with our internal thought leadership and professional network of industry luminaries and leading academics. All Wealth Management Institute thought leadership is driven and vetted by the Management & Guidance leadership team. This article is provided for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Bank of America Corporation or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account a client s particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument or strategy. Before acting on any recommendation, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. GWM Management & Guidance (IMG) provides industry-leading investment solutions, portfolio construction advice and wealth management guidance. Diversification and dollar cost averaging do not guarantee a profit or protect against a loss in declining markets. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you must consider your willingness to continue purchasing during periods of high or low price levels. Some or all alternative investment programs may not be suitable for certain investors. Many alternative investment products, specifically private equity and most hedge funds, require purchasers to be qualified purchasers within the meaning of the federal securities laws (generally, individuals who own at least $5 million in investments and institutional investors who own at least $25 million in investments, as such term is defined in the federal securities laws). No assurance can be given that any alternative investment s investment objectives will be achieved. In addition to certain general risks, each product will be subject to its own specific risks, including strategy and market risk. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill Lynch entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available through the Merrill Lynch family of companies. Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal, professional advisors. International investing presents certain risks not associated with investing solely in the U.S. These include, for instance, risks related to fluctuations in value of the U.S. dollar relative to the value of other currencies, custody arrangements made for a fund s foreign holdings, political and economic risk, differences in accounting procedures, and the lesser degree of public information required to be provided by non-u.s. companies. Foreign securities may also be less liquid, more volatile and harder to value, and may be subject to additional risks relating to U.S. and foreign laws relating to foreign investment. These risks are heightened when the issuer of the securities is in a country with an emerging capital market Bank of America Corporation ARGL4Y PM-1014