“Overconfidence is a very serious problem. If you don’t think it affects you, that’s probably because you’re overconfident.”1
That’s a quote from Carl Richards, a financial advisor, author, speaker, columnist and New York Times sketch artist who is well known for capturing the ethos of behavioral finance in simple words and pictures.
The study of behavioral economics and behavioral finance has come a long way in helping us understand how society’s collective actions can impact the investment markets and why, on an individual basis, we make the financial decisions we do.2
This knowledge in turn can help us control the impulsive decisions that may be costly and also lead to more purposeful actions that may improve our individual financial situation. A new study from the Deloitte Center for Financial Services defines 10 different behavioral biases that are common among investors. Three of them are:3
Passive decision making, or thinking that the easiest path is the best one
Loss aversion, when we prefer to avoid losing money over acquiring gains
Overconfidence; thinking that because you believe in an idea, it’s going to work
The thing about human nature is that we are all prone to impulses. If we don’t control them, our financial strategy may be affected — and possibly, our financial future. That’s one reason why working with a financial advisor is so important.
Not only can we help you create a financial strategy designed for your specific situation, but we can also help you stay on track to pursue your financial goals. So if you’re feeling an impulse to make a change, contact us first. We can help you differentiate between behavioral impulses and sound financial decision making.
Another interesting aspect of behavioral finance can be observed in our children. Much like other personality traits, they seem to develop tendencies either to buy or have an indifference to money at an early age. You may have witnessed this among your own children — raised in the same household with the same values — but they have completely different approaches to spending money.
While some of these instincts are inherent, we should make it a priority to teach our children and grandchildren sound financial principles. Not just when they’re young, but throughout their lifetime.4 Sharing stories of your own successes and bad money decisions can help shape their behavior. Because, as behavioral finance demonstrates, we never stop having perfectly natural human impulses. But our awareness, and our responses to them, may make a difference.
1 Nocturne Capital. Sept. 6, 2016. “14 Great Behavioral Finance Quotes.” http://www.nocturnecapital.com/blog/2016/3/31/15-great-behavioral-finance-quotes. Accessed Sept. 23, 2016.
2 Michelle M. Waymire. Nasdaq.com. Aug. 15, 2016. “A Fly-By History of Behavioral Finance.” http://m.nasdaq.com/article/a-fly-by-history-of-behavioral-finance-cm665269. Accessed Sept. 23, 2016.
3 Michelle Canaan and Jaykumar Shah. Deloitte. June 1, 2016. “To save or not to save for retirement, that is the question: Is behavioral economics the answer?” https://quicklookblog.com/2016/06/01/to-save-or-not-to-save-for-retirement-that-is-the-question-is-behavioral-economics-the-answer/?linkId=27837898. Accessed Sept. 23, 2016.
4 M.P. Dunleavey. Time. Sept. 22, 2016. “My Kid Loves to Spend. Here’s How I’m Dealing With It.” http://time.com/money/4504314/children-money-behavioral-economics/. Accessed Sept. 23, 2016.
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