This paper aims to use Lean Six Sigma (LSS) and consumption mapping concepts to develop a disciplined methodology for a self-directed investor so that adverse decision-making behaviors are avoided. Classical financial theories assume that individuals maximize expected utility by arriving at financial decisions in a rational manner. But, over time, investor performance has lagged behind corresponding market performance. Despite these results and research on their causes, investors continue to repeat systematic mistakes leading to suboptimal financial outcomes.
Consumption maps are developed based on behavioral finance research that shows why investors make predictable and costly errors in their decision making. The authors show that the contemporary methodologies within LSS, used successfully in the manufacturing and service sectors, can be used to enforce rationality in investing.
The approach proposed herein provides a new framework that researchers should be able to test in practice. By applying a structured, disciplined approach based on the Design-Measure-Analyze-Improve-Control (DMAIC) methodology of LSS, it is posited that the gap between financial theory and actual results can be bridged.
Rather than hoping to avoid irrational behavior through self-awareness of behavioral biases, the DMAIC approach will standardize self-directed investor decision-making so that discipline is enforced.
The authors would like to thank Michelle McClellan and Dalbar, Inc., for their assistance with the research contained herein and the preparation of this manuscript.
Peteros, R.G. and Maleyeff, J. (2015), "Using Lean Six Sigma to improve investment behavior", International Journal of Lean Six Sigma, Vol. 6 No. 1, pp. 59-72. https://doi.org/10.1108/IJLSS-03-2014-0007
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