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Behavioral Finance and The Psychology of Money

Behavioral Finance and The Psychology of Money

March 22, 2023

What is behavioral finance?

Behavioral finance is the study of how human behavior affects financial decisions and markets. It helps us understand how and why people make financial decisions, both good and bad.  Behavioral finance also examines potentially damaging financial decisions which are often impacted more by psychology than facts, and how we can mitigate these biases to make sound investment decisions.

At the Orion Ascent conference in 2023 Dr. Daniel Crosby, a renowned behavioral finance expert, spoke about his work. In his work, Crosby highlights that investors are human and, therefore, not always rational beings.  They can potentially be influenced by emotions such as fear and greed. Crosby notes that these emotions can lead to irrational decisions, including buying high and selling low, or chasing the latest investment fads. By understanding these behavioral biases, we can help you make more informed and successful investment decisions.

What are behavioral biases that influence financial decisions?

One common behavioral bias is overconfidence, which can lead investors to believe they have more knowledge or skill than they actually do. This can result in excessive trading or taking on too much risk. 

Another bias is loss aversion, where investors are more likely to feel the pain of losses than the pleasure of gains. This can cause investors to hold onto losing investments for too long or avoid taking risks that could lead to potentially high returns.

How does financial planning work with behavioral finance and biases? 

As financial advisors, it is our role to help people recognize and mitigate these biases. By building a diversified investment portfolio that aligns with your risk tolerance and financial goals, we can help reduce the impact of market volatility and emotional decision-making. Additionally, regular reviews of your portfolio and financial plan can help ensure that your investments remain aligned with your goals and that you stay on track for long-term success.

In conclusion, behavioral finance is a crucial element of successful investing. By recognizing and addressing the emotional biases that can impact investment decisions, we can help you achieve your financial goals and build a secure financial future. Together, we can work to build a solid investment strategy that is grounded in reason and evidence, and free from the emotional biases that can derail even the best laid plans. 

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