The financial sector is turning to psychology to help understand why investors make the decisions they do
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The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
Key takeaways:
Humans are not great at making rational investment decisions. As highly emotional beings, decision making is often clouded by instinct or reaction rather than by cold, hard analytical investigation.
The financial sector is turning to psychology to help understand why investors make the decisions they do and attempt to improve outcomes using behavioural finance.
Paul Kaplan, research director at Morningstar Canada, says: “The insights of behavioural finance are not just for academics to debate. They have important implications for investors. By understanding the systematic cognitive errors that we tend to make, we can manage them and become better investors. This is what financial advisers who provide behavioural coaching help their clients do.”
Advocates of behavioural finance have identified numerous drivers of irrational investment decision making, which range from over- and under-confidence, to information overload and lack of knowledge. These can largely be condensed into six areas:
Humans are certainly not infallible, but behavioural finance has helped advisers understand where investors are likely to make mistakes. Taking time to understand personality types and risk appetites can make all the difference between investment success and failure.
Risk Disclaimer
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
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