Behavioral finance is the study of how investors make decisions-and how these decisions affect stock prices and broad market movements. Investors are human, and humans aren't perfectly rational. When they buy on emotion, they not only jeopardize their own investment plans, but also create opportunities for others in the market. In the three years since a 2003 launch in the United States, JP Morgan's behavioral finance products had attracted new assets at a rapid pace. The Asset Management unit at JP Morgan had been a pioneer in what it termed "Behavioral Investing." It had over a decade of experience since 1992 when it offered an initial retail product in the United Kingdom. In the late 1990s, JP Morgan offered a wider range of mutual funds in the U.K. and Europe, and began to focus its efforts on the larger U.S. market. On the investment side, Chris Complin, chief investment officer (CIO) for behavioral finance products globally, had all five new products in the top 20% of their Lipper categories. This provided confirmation for a concept that been successfully applied internationally. On the business side of the Asset Management unit, Richard Chambers, the head of U.S. and European marketing, had given investor psychology a central role in the branding of the new funds. The idea that well documented behavioral biases could create opportunities for JP Morgan's investment managers seemed to resonate with retail investors. Competing asset managers used similar investing principles, but few had gone as far in embracing psychology and behavioral finance in the retail market. So far, JP Morgan's approach had been successful. By the third quarter of 2006, total assets under management in U.S. funds had risenfrom $100 million in the first quarter of 2003 to over $20 billion. Overall, JP Morgan now managed more than $715 billion in behavioral strategies worldwide. The challenge was for Complin to continue the winning streak on a larger scale, as they had done across Europe, even as competition from other investment managers intensied. And, for Chambers, the goal was to solidify JP Morgan's behavioral finance brand with retail brokers. JP Morgan JP Morgan Chase Sc Co. was a leading global nancial services firm with assets of $1.3 trillion and operations in more than 50 countries:1 The company' s earliest predecessor organization dated back to 1.799. Key transactions which led to the formation of JP Morgan Chase included the 2000 merger between JP Morgan and Chase Manhattan, combining four of the largest and oldest money center banking institutions in New York City (JP Morgan, Chase, Chemical, and Manufacturers Hanover) into one firm. In 2004, the company merged with Bank One and acquired Highbridge Capital Management, a New York-based hedge fund with $2 billion under management.5 The company was organized into six major business segments under three brands: The Investment Bank and Asset Wealth Management (JP Morgan brand), Treasury 8: Securities Services (JP Morgan Chase brand), Commercial Bank, Card Services, and Retail Financial Services (Chase Brand). (See Exhibit 1 for financial summary.) Under the JP Morgan brand, the investment Bank provided clientscorporations, financial institutions, governments and institutional investors worldwidewith merger and acquisition advice, capital raising, restructuring, risk management and research. In addition, the bank participated in proprietary trading and investing and market-making in cash securities and derivative instniments around the world. Also, under the JP Morgan brand was the Asset 5: Wealth Management segment described below. Under the JP Morgan Chase brand, Treasury in Securities Services delivered payment, collection, liquidity and investment, trade finance, commercial card and information solutions to clients. Clients included corporations, financial services institutions, middle market companies, small business, and governments and municipalities. And under the Chase brand, the Commercial Bank had 25,000 clients and provided, through itself or by partnering with other JP Morgan Chase units, lending, treasury services, investment banking and investment management to corporations, municipalities, financial institutions and non- profit entities with annual revenues which typically ranged from $10 million to $2 billion. Card Services with more than 110 million credit cards in circulation was one of the largest credit card issuers in the U.S. Retail Financial Services provided consumers and small business owners with banking services and products, including checking and savings accounts, credit, certificates of deposits, home and auto loans, insurance, and cash management. Behavioral Finance JP Morgan's behavioral finance process began in 1992 in London. Even in 2006, two thirds of the $76 billion AUM in behavioral finance products was in non-U.S. stocks. Andrew Spencer, the CIO for European equities at the time, developed the company's first behavioral finance mutual fund in 1992. The fund, called Premier Equity Growth, was offered only in the United Kingdom. It had an enviable track record, beating its benchmark in nine of its first 10 years. And, JP Morgan introduced two new funds that used the same principles, U.K. Strategic Value and U.K. Dynamic. When Spencer retired in early 2006, he passed the reins to his protege Complin who had been with him since the early days of the strategies in the U.K. Under Complin's direction, JP Morgan continued to successfully gather assets in Europe and under the Intrepid brand in the U.S., doubling AUM in the U.S. funds since Spencer's retirement. (See Exhibit 4 for performance of the Intrepid funds, excluding the small multi-cap fund.) By the end of 2006, Complin's team consisted of 53 investment professionals in the U.K., 12 in the U. S., and 12 in Asia.Conclusion Complin and Chambers had little time to savor the recent successes. Having proven the concept, the team was looking to expand. In January 2006, JP Morgan launched an Intrepid Long/Short product. And in October, the firm announced its plan to roll out behavioral finance products in Japanese equities in 2007.14 And, challenges remained. The success of the behavioral finance strategies had attracted new competition. Moreover, a wider range of strategies, built on value and momentum, had netted record capital flows, raising the possibility that these anomalies had been arbitraged away.Exhibit 10 Retail Charges, Commissions, and Expenses for Equity Funds Annual Net Sales Charge Commission Fee Expenses (Load) as Percent Paid to Financial Deducted from Mutual Fund Amount of Purchase of Offering Price Intermediary Assets Equity Class A Less than $50,000 5.25% 4.75% $50,000 to $99,999 4.50% 4.05% $100,000 to $249,000 3.50% 3.05% $250,000 to $499,999 2.50% 2.05% $500,000 to $999,999 2.00% 1.60% $1milion or more 0.00% Any amount 1.24% to 1.25% Equity Class B Any amount 0.00% 4.00% 1.84% Equity Class C Any amount 0.00% 1.00% 1.75% to 1.84% Source: Sales Charges and Breakpoints, Effective December 22, 2006, via website http://www.jpmorganfunds.com/pdfs/ other / salescharges.pdf, accessed on February 9, 2007; JPMorgan U.S. Equity Funds Prospectus, November 1, 2006. Notes: (a) Equity Class A funds included JPMorgan International Equity funds, Specialty funds, Tax Aware funds, and U.S. Equity funds, and had front-end sales charges for amounts under $1 million. (b) Equity Class B shares had no front-end sales charge, but were charged a contingent deferred sales charge (CDSC) if redeemed within six years: Years since Purchase CDSC 0-1 5.00% 1-2 4.00% 2-4 3.00% 4-5 2.00% 5-6 1.00% More than 6 0.00% Equity Class B shares automatically converted to Class A shares after eight years. There