“Wall Street has a few prudent principles; the trouble is that they are always forgotten when they are most needed.” – Benjamin Graham

Investing isn’t just about numbers and calculations; it’s deeply intertwined with the quirks of human psychology. Behavioural finance, a field that blends behavioural and cognitive psychological theory with conventional economics, reveals how emotions and cognitive errors influence investors. Despite traditional financial theories that tout human rationality, real-world experiences prove we’re often anything but.

First coined in the 1980s, behavioral finance challenges the notion that individuals make decisions purely based on rationality and access to information. It suggests that psychological influences and biases frequently affect the financial behaviors of investors, leading to less than optimal decisions.

To navigate the investing landscape effectively, it’s crucial to recognise common biases that can cloud judgement:

  • Overestimating our knowledge can lead to poor investment choices.
  • Errors in processing information can significantly sway our decisions.
  • Emotional responses can disrupt rational thinking and lead to erratic decisions.
  • The opinions or actions of others can heavily influence our investment decisions.

Becoming an impartial investor requires deliberate strategies to mitigate these biases:

  1. Focusing on a well-defined decision-making process encourages thoughtful, reflective thinking over impulsive reactions. This approach lessens the impact of biases and leads to more deliberate and rational decisions.
  2. Behavioural finance teaches the importance of preparation and commitment to an investment plan. By establishing and adhering to a structured plan, investors can align their actions with their financial goals, reducing the influence of fleeting emotions and market pressures.

At WellsFaber, we understand the complexities of behavioral finance and are dedicated to helping you navigate them. By implementing robust principles and supporting you in your commitment to them, we aim to guide you towards becoming a more disciplined and successful investor.

We advise, you thrive.