1. INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2. This material is provided on an informational basis only and should not be construed as a solicitation for any specific Legg Mason product or service. All discussion of behavioral finance, and market psychology reflects general principles and does not represent a recommendation for specific action. All investments involve risk including loss of principal amount invested. There is no guarantee that investment objectives will be achieved. Investors should carefully consider their objective, risk tolerance and time horizon before investing. IMPORTANT INFORMATION 2

3. CLICK TO EDIT MASTER TITLE STYLE Today’s agenda Are you a rational investor? What is behavioral finance? Noise vs. signal: The quest for meaning When emotions take over: Decisions made on feelings When perception is deception: Decisions based on misinformation When logic isn’t enough: Decisions based on faulty judgment Staying on track: Lessons for investors 3

4. ARE YOU A RATIONAL INVESTOR?

5. 5 This chart is for illustrative purposes only and does not represent actual performance, past or future, of any investment. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charge. Past performance is no guarantee of future results. The S&P 500 and Barclays U.S. Aggregate Bond Index performance does not reflect the deduction of any fees or expenses. Please note that the S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. The Barclays U.S. Aggregate Bond Index is a broad-based bond index composed of government, corporate, mortgage and asset-backed issues rated investment grade or higher and having at least one year to maturity. Please note that an investor cannot invest directly in an index. Source: DALBAR Quantitative Analysis of Investor Behavior 2015; www.dalbarinc.com. DALBAR uses industry cash flow reports from the Investment Company Institute (ICI), www.ici.org, to calculate the figure for the “Average equity fund investor” and “Average fixed income fund investor” categories. The figures are based on the ICI’s reports for the “stock fund” and “fixed income fund” categories, which represent flows and performance for U.S. mutual fund assets. “Average equity fund investor” and ”Average fixed income fund investor” — as defined by DALBAR — refer to the universe of all mutual fund investors whose actions and financial results are restated to represent a single investor. This approach allows the entire universe of mutual fund investors to be used as the statistical sample, ensuring ultimate reliability. “Average equity fund investor” and “Average fund investor” returns are calculated by the DALBAR Quantitative Analysis of Investor Behavior (QAIB) Report. QAIB calculates investor returns as the change in assets after excluding sales, redemptions and changes. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor returns in dollar terms, two percentages are calculated: total investor return rate for the period and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions and exchanges for the period. ARE YOU A RATIONAL INVESTOR? Average fund investor vs. market indexes performance (%) One-year returns for 2014

6. WHAT IS BEHAVIORAL FINANCE?

7. 7 BEHAVIORAL FINANCE DEFINED Behavioral finance draws on finance, psychology and sociology to explain these common investor mistakes: Emotional Where decisions are made based on feelings rather than logic. Perceptual Where information is misunderstood or taken out of context. Intellectual Where the mental process for making decisions is faulty.

8. NOISE VS. SIGNAL: THE QUEST FOR MEANING

9. 9 Everyone’s got an opinion… Cable TV The daily paper The Internet Talk radio Financial magazines Financial newspapers Friends Family Your dry cleaner “The market is strong!” “The market is weak!” “Profits are up!” “Profits are down!”

10. Researchers who conducted a study on 401(k) accounts showed the more investment options, the less participation in the 401(k) plan. 10 CHOICE OVERLOAD: Too much choice equals confusion Source: “When Choice is Demotivating: Can One Desire Too Much of a Good Thing?,” by S.S. Iyengar and M. Lepper, M., Journal of Personality and Social Psychology, 79, 995-1006, 2000. “How Much Choice is Too Much?: Contributions to 401(k) Retirement Plans,” by S.S. Iyengar, W. Jiang, and G. Huberman, Pension Research Council of the Wharton School of the University of Pennsylvania (2003). Please note that the figures cited in the above chart are estimates based on the illustrations provided in the research. The relation between participation and the number of funds offered (%)

11. WHEN EMOTIONS TAKE OVER: DECISIONS MADE ON FEELINGS 11

12. 12 WHEN EMOTIONS TAKE OVER: Decisions made on feelings Fear The most dangerous emotion of all Overconfidence ‘I’m on a roll’ Loss aversion ‘No regrets’ Thrill seeking ‘I want to shake things up’

13. 13 Source: Legg Mason, 2014. Please note that this image is for illustrative purposes only. WHEN EMOTIONS TAKE OVER: Riding an emotional rollercoaster Does investing make you feel like you’re on an emotional roller coaster?

14. 14 WHEN EMOTIONS TAKE OVER: Overconfidence: ‘I’m on a roll’ Too many people confuse access to financial information with having the expertise of an investment professional. Overconfidence can lead to: Understating the price swings of a security Taking excessive risks …When you get overconfident, that’s when something snaps up and bites you. Jim Abbott Professional baseball player

15. 15 WHEN EMOTIONS TAKE OVER: Overconfidence: The behavioral view How would you rate your automobile driving skills?  Above average?  Below average?

16. In one study, 93% rated themselves above average… …far more than is actually possible! 16 Source: “Are we all less risky and more skillful than our fellow drivers?”, by Ola Swenson, Acta Psychologica, Volume 47, Issue 2, February 1981, pp. 143-148. WHEN EMOTIONS TAKE OVER: Overconfidence: The behavioral view Overconfidence: the behavioral view (%)

17. 17 The tendency to avoid accepting the reality of losing money Consider this wager: We flip a coin. If heads, you lose $100; if tails, you win $100. Do you take the bet? WHEN EMOTIONS TAKE OVER: Loss aversion: ‘no regrets’ Loss aversion research shows people look for a potential gain at least TWICE as large as the potential loss in order to accept this gamble* *“A Conversation With Daniel Kahneman; On Profit, Loss and the Mysteries of the Mind, “ by Erica Goode, November 5, 2002, The New York Times.

18. 18 WHEN EMOTIONS TAKE OVER: Loss aversion: ‘No regrets’ Consequences: Do nothing and miss good opportunities Take imprudent risks to make up a loss Holding onto a “loser” too long

19. A hypothetical investor purchase 19 WHEN EMOTIONS TAKE OVER: Loss aversion: Regret minimization Which investor is less likely to sell?  Investor 1  Investor 2 Source: Legg Mason, 2014. This graphical depiction is hypothetical and for illustrative purposes only. Security A’s price rose to $30 before falling to $15

20. 20 WHEN EMOTIONS TAKE OVER: Thrill seeking: ‘I want to shake things up’ What is a T-Type personality? Easily bored individuals who have a tremendous appetite for excitement. Those who seek out daring experiences. T-Types are prone to take risky positions with the goal of quickly turning a profit. What are the consequences? Taking on too much risk Making too many trades

21. 21 WHEN EMOTIONS TAKE OVER: Fear: The most dangerous emotion Why? It has immediate effects on our physical bodies that affect our thinking Increased heart rate Shallow breathing Goosebumps What are the dangers for investors? Panic selling Investment “paralysis” What is the best defense? Make a plan for adversity and follow it, not your emotions

22. WHEN PERCEPTION IS DECEPTION: DECISIONS BASED ON MISINFORMATION

23. 23 WHEN PERCEPTION IS DECEPTION: Decisions based on misinformation Pattern recognition ‘I see, therefore I think.’ Framing ‘It’s not what you say, but how you say it.’ Prejudice ‘I know what I know.’ Hindsight bias ‘I could have predicted that!’ Anchoring ‘Stuck on you.’

24. 24 WHEN PERCEPTION IS DECEPTION: What do you see? Source: Legg Mason, 2014. This graphical depiction is hypothetical and for illustrative purposes only.

25. 25 WHEN PERCEPTION IS DECEPTION: Anchoring: ‘Stuck on you’

26. 26 WHEN PERCEPTION IS DECEPTION: Hindsight bias: ‘I could have predicted that!’ Inclination to see past events as more predictable than they actually were — the “Monday Morning Quarterback” phenomenon Seeing the past through “rose-colored” pair of glasses What are the consequences? o Believing that you’re smart when you were only lucky Hindsight is always twenty-twenty. Billy Wilder

27. 27 WHEN PERCEPTION IS DECEPTION: Prejudice: ‘I know what I know’ Perception based on limited experiences Can hinder our acceptance or denial of the truth “I once owned a small-cap value investment and it was a stinker…I’ll never buy one of those again.” “I only purchase investments that are within the top quartile.” “My father got burned in the bond market… there’s no way I’ll ever buy fixed income.” “I once owned a small- cap value investment and it was a stinker… I’ll never buy one of those again.”

28. 28 Examples of Framing WHEN PERCEPTION IS DECEPTION: Framing: ‘It’s not what you say, but how you say it’ Half-empty vs. half-full 50% chance of success vs. 50% chance of failure $3 a day vs. $1,095 a year Excitement about a 10 percent raise when the rate of inflation is 12 percent rather than with a 5 percent raise when the rate of inflation is at 3 percent. The manner in which a choice has been presented becomes evident in what is known as the “money illusion”

29. 29 Source: Bloomberg. Past performance is no guarantee of future results. The charts provided is for illustrative purposes only and represents unmanaged indices in which investors cannot directly invest. The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charge. WHEN PERCEPTION IS DECEPTION: Pattern recognition: ‘I see, therefore I think’ S&P 500 performance December 31, 2006 – December 31, 2014

30. 30 WHEN LOGIC ISN’T ENOUGH: DECISIONS BASED ON FAULTY JUDGMENT

31. 31 When logic isn’t enough: Decisions based on faulty judgment Heuristics ‘You can’t compare apples to oranges’ Mental accounting ‘Everything is in its place’

32. 32 WHEN LOGIC ISN’T ENOUGH: Mental accounting: ‘Everything is in its place’ Source: Legg Mason, 2014. A CD is a debt instrument issued by a bank that usually pays an interest rate set by competitive forces in the marketplace. CDs are FDIC-insured up to $250,000, offer a fixed rate of return, but may be subject to fluctuating rates and early withdrawal penalties. *Illustration based on research from “Toward A Positive Theory of Consumer Choice,“ by Richard H. Thaler, Journal of Economic Behavior and Organization, Vol. 1: pp. 39-60. 1980.

33. 33 WHEN LOGIC ISN’T ENOUGH: Mental accounting: ‘Everything is in its place’ Source: Legg Mason, 2014.

34. 34 Would you use the same criteria to select an emerging market investment* as a U.S. “blue-chip” stock? Or do you consider other criteria? WHEN LOGIC ISN’T ENOUGH: Heuristics: ‘You can’t compare apples to oranges’ Heuristics are simple rules that people use to make decisions when facing complex problems or incomplete information. For instance, many people tend to believe in “the more expensive the beverage the better it tastes.”

35. STAYING ON TRACK: LESSONS FOR INVESTORS

36. 36 STAYING ON TRACK: Lessons for investors Work with a trusted financial advisor Identify your goals, your time horizon and your tolerance for risk Don’t let emotions drive your decisions Focus on building wealth instead of reducing losses Understand your perceptions Avoid ‘mental accounting’

37. 37 “When I let go of what I am, I become what I might be” ― Lao Tzu

38. 38 For broker/dealer use only. Not for use with the public. leggmason.com 1-800-822-5544 youtube.com/leggmason linkedin.com/company/legg-mason @leggmason Brandywine Global ClearBridge Investments Martin Currie Permal QS Investors Royce & Associates Western Asset Legg Mason is a leading global investment company committed to helping clients reach their financial goals through long term, actively managed investment strategies. A broad mix of equities, fixed income, alternatives and cash strategies invested worldwide A diverse family of specialized investment managers, each with its own independent approach to research and analysis Over a century of experience in identifying opportunities and delivering astute investment solutions to clients All discussions of behavioral finance and market psychology reflects general principles and does not represent a recommendation for specific action. All investments involve risk, including loss of principal amount invested. There is no guarantee that investment objectives will be achieved. Investors should carefully consider their objective, risk tolerance and time horizon before investing. © 2015 Legg Mason Investor Services, LLC. Member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc. 9/15 FN1513282