8 Great Lessons Taught by Behavioral Finance
The WSJ this week has a great article that takes a step away from standard traditional thinking and taps into what is known as behavioral finance. According to behavioral finance we are all over emotional investors who are “normal smart” at some times and “normal stupid” at others.
This concept is what separates successful and unsuccessful traders,
Successful professional traders are subject to the same emotions as the rest of us. But they counter it in two ways. First, they know their weakness, placing them on guard against it. Second, they establish “sell disciplines” that force them to realize losses even when they know that the pain of regret is sure to follow.
By understanding out own weaknesses and bringing them to a conscious level any investor can improve his or her investing abilities. So what are some recent lessons taught by behavioral finance? Below are eight:
- Goldman Sachs is faster than you.
- The future is not the past, and hindsight is not foresight.
- Take the pain of regret today and feel the joy of pride tomorrow.
- Investment success stories are as misleading as lottery success stories.
- Neither fear nor exuberance are good investment guides.
- Wealth makes us happy, but wealth increases make us even happier.
- I’ve only lost my children’s inheritance.
- Dollar-cost averaging is not rational, but it is pretty smart.
Each lesson has a full paragraph discussing it in further detail. As far as psychology is concerned this article is definitely a weekly dose, so take a read through it and see what you get out of it. It is a very good read.
Source:
The Mistakes We Make—and Why We Make Them
Meir Statman
WSJ, August 24th, 2009
