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OVERHEARD IN THE DOCTOR’S LOUNGE

By Jaan E. Sidorov MD

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DEFINITION: Prospect theory is a theory of behavioral economics and behavioral finance that was developed by Daniel Kahneman and Amos Tversky in 1979. The theory was cited in the decision to award Kahneman the 2002 Nobel Memorial Prize in Economics.

CITE: https://www.r2library.com/Resource/Title/0826102549

CASE MODEL:

Amanda, an RN client, was just informed by her financial advisor that she
needed to re-launch her 403-b retirement plan. Since she was leery about
investing, she quietly wondered why she couldn’t DIY. Little does her FA know
that she doesn’t intend to follow his advice, anyway! So, what went wrong?

The answer may be that her advisor didn’t deploy a behavioral economics
framework to support her decision-making. One such framework is the
“prospect theory” model that boils client decision-making into a “three step
heuristic.”

Prospect theory makes the unspoken biases that we all have more explicit. By
identifying all the background assumptions and preferences that clients
[patients] bring to the office, decision-making can be crafted so that everyone
[family, doctor and patient] or [FA, client and spouse] is on the same page.

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Briefly, the three steps are:

• Simplify choices by focusing on the key differences between investment
  [treatment] options such as stock, bonds, cash, and index funds.
• Understanding that clients [patients] prefer greater certainty when it comes to
  pursuing financial [health] gains and are willing to accept uncertainty when
  trying to avoid a loss [illness].
• Cognitive processes lead clients and patients to overestimate the value of their choices thanks to survivor bias, cognitive dissonance, appeals to authority
  and hindsight biases.

ASSESSMENT

Much like in healthcare today, the current mass-customized approaches to the financial services industry fall short of recognizing more personalized advisory approaches like prospect theory and assisted client-centered investment decision-making.

YOUR COMMENTS ARE APPRECIATED.

Thank You

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RISK MANAGEMENT: https://www.routledge.com/Risk-Management-Liability-Insurance-and-Asset-Protection-Strategies-for/Marcinko-Hetico/p/book/9781498725989

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Filed under: "Advisors Only", "Doctors Only", Career Development, Experts Invited, Financial Planning, Glossary Terms, Investing | Tagged: Daniel Kahneman, doctors lounge, financial decision making, Financial Planning, investing psychology, Jaan Sidorov MD, Prospect Theory |