Professor Meir Statman’s Q&A below discusses how normal people act and what Behavioral Finance is.
“Behavioral Finance is the study of the behavior of normal investors, people like me, people like you. We are normal smart most of the time but sometimes we are normal stupid.”
This is a good short article on how people perceive investing (like playing tennis against the wall = sitting at their computer buying and selling on the screen … their is another person involved in investing too he explains). He gives names to our emotions like fear, emotional regret, and overconfidence. He then explains how emotions may be useful in other settings, but not when it comes to investing.
Here’s a short blog and video on fear … it seems that people are hypersensitive to even the smallest of market downturns … they are like the cat after touching a hot stove … never to go near investing again. Understanding the difference between hot coils on the stove and the stove itself is what is important … why they got burned. It is not the investments, but the emotional approach to investing that burns most investors.
One common misperception I see is confusing investing to get you TO retirement, versus getting you THROUGH retirement. The problem from misperception forms anchoring decisions based on the first is that you artificially make the real time line much shorter than it really is. For those in retirement, they’ve realized they have many more years ahead of them. For those not yet retired, I suggest you anchor your decisions to your older, longevity table derived, age like those retired do.
Evolution has made us bad investors from a time when fear saved us. We don’t live in those times anymore and shouldn’t jump at shadows.
So embrace those feelings and learn how to approach the markets. Otherwise, those emotions may well keep you from having the money available to support you later, be it for education, retirement, or what ever goal you have.
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Disclosure: I do use DFA sub-managed SA Funds with most clients (not a fund requirement, but a business decision I’ve made for clients) that are a component of what is discussed in this article when they mention Loring Ward.