Knowledge and Risk
Should you Engage an Investment Advisor? | Psychology of Individual Investors | Are You Overconfident? | Are You Lucky? | Murphy’s Law, Black Swans and Donald Rumsfeld
Behavioral Finance (BF) is the discipline that seeks to understand the emotions and cognitive biases almost all investors have and which substantially degrade their investment decisions. BF thereby challenges the foundation of economics and finance both of which depend on the assumption that economic actors are always rational, or that deviations from rational decisions are soon eliminated by market responses.
BF has even branched out recently into “neurofinance”, which is a research area that uses brain-scanning equipment to literally watch how peoples’ brains operate during financial decision-making. (No, we don’t offer brain scanning as one of our services!)
This is powerful stuff, and we give a very brief overview here.
The most important thing for us to take away from the field of Behavioral Finance is the recognition that there is a large number of cognitive and emotional biases we all have and which can cause poor investment decisions. With this recognition and discipline we can improve our decision-making processes.
We get a bit philosophical in this article on Luck, which is about how we face the always uncertain future. We also addess research about whether people have a personality that stimulates their own luck.
