So I just finished reading “Hedge Fund Compliance: Risks, Regulation, and Management” by Jason A. Scharfman, and I wanted to share what I learned. This book is dense. Like, really dense. But the stuff inside is important if you want to understand how hedge funds actually follow the rules (or don’t).
Twenty-nine posts. Twenty biases. Four investor types. Two guidelines. And one big idea that runs through everything: you are not a rational investor, and that is okay as long as you know it.
Chapter 27 is the final content chapter of the book, and it is the one that brings everything together. After learning about 20 biases, two guidelines, a diagnostic framework, and two case studies, we now get the detailed profiles of all four Behavioral Investor Types.
We have spent the last 23 chapters learning about 20 different biases. That is a lot of biases to keep track of. Even for a financial advisor who does this for a living, diagnosing each client for all 20 biases would take forever.
Chapter 25 is where all the theory from the entire book gets applied to actual people. Well, fictional people. But they feel real enough that you will probably recognize yourself or someone you know in one of them.
After 20 chapters of learning about individual biases, Pompian finally gets to the big question: so what do you actually DO with all this knowledge?
This is the last emotional bias in Pompian’s book, and it is an interesting one because it touches on identity. Affinity bias is about investing based on who you think you are (or who you want to be), rather than what actually makes financial sense.
The opening quote of this chapter is from Harry Markowitz, the father of Modern Portfolio Theory. He said he split his retirement contributions 50/50 between bonds and equities because he wanted to “minimize my future regret.” Not maximize returns. Not optimize the efficient frontier. Minimize regret.
You know that feeling when you are selling something on Craigslist and you think your used couch is worth $500, but nobody will pay more than $200? That is endowment bias in action. The moment you own something, it magically becomes more valuable in your mind.
Machiavelli said it over 500 years ago: “Whosoever desires constant success must change his conduct with the times.” But here we are, centuries later, and most of us still prefer to just… not change anything.