BEHAVIOURAL FINANCE

Behavioural finance is a relatively new science which seeks to explain how human emotions can lead to unpredictable, irrational and harmful investment decisions.

According to conventional financial theory the vast majority of people are rational “wealth maximisers”. However, there are repeated instances in which emotion and psychology drive otherwise logical investors to make decisions that are financially harmful. Learning more about behavioural finance and using it when making your investment decisions and reviewing your clients’ instructions could boost performance and add real value to your practice.
Overconfidence and overoptimism

Investors overestimate their ability and the accuracy of the information they have.

Representativeness

Investors assess situations based on superficial characteristics rather than underlying probabilities.

Availability bias

Investors overstate the probabilities of recently observed or experienced events because the memory is fresh.

Frame dependence and anchoring

How information is presented can affect the decision made.

Regret aversion

Individuals make decisions in a way that allows them to avoid feeling emotional pain in the event of an adverse outcome.

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About the author

Paul Bolt, our wine expert, was recently inducted as a Chevalier de Champagne and actively trades on Livex.

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