A Primer on Behavioral Finance (courtesy of Aberdeen standard)

Introduction

What is behavioural finance? What behaviours prevent us from making the right investment choices? How can we improve our investment decision making?

The study of behavioural economics allows us to better understand the decisions we make. We show how behavioural finance can lead to better investment decision making. We explore the inherent biases we must overcome to achieve our long-term investment goals. And we provide six tips to improve investment decision making.

Digging deeper, we look at ‘noise’, the random and irrelevant variables that affect our decisions. And we provide lessons from four books that changed the way we think about thinking.

Executive Summary

Behavioural finance aims to influence – and hopefully improve – our financial decisions. It helps us understand the gap between how we should invest and what we actually do. This ‘behavioural gap’ can come with a significant cost – sub-optimal investment performance.

An understanding of our own behaviour should be at the forefront of every decision we make. We exhibit a number of biases in our decision making. While we cannot remove these biases, we can seek to better understand them. We can build more systematic processes that prevent these biases adversely influencing the decisions we make.

Investors should focus on those biases that are most likely to impact their investment decisions – and those supported by robust evidence. We have developed a checklist to reduce errors from the key behaviours that affect our investment decisions – ‘MIRRORS’.

Our decisions are affected by noise; random fluctuations in irrelevant factors. This leads to inconsistent judgement. Investors can reduce the effects of noise and bias through the consistent application of simple rules.

We offer six simple steps to improve decision making; three dos and three don’ts.

  1. Do have a long-term investment plan.
  2. Do automate your saving.
  3. Do rebalance your portfolio.
  4. Don’t check your portfolio too frequently.
  5. Don’t make emotional decisions.
  6. Don’t trade! Make doing nothing the default.

These six steps seem simple but are not easy. We cannot remove our biases, or ignore the noise. Instead, we must build an investment process that helps us overcome them.

https://www.aberdeenstandard.com/en/uk/investor/insights-thinking-aloud/article-page/a-behavioural-finance-toolkit

arrow

Authors

Joe Wiggins, Fund Manager

Joe completed an MSc in Behavioural Science at the London School of Economics. He was awarded the Brian Abel-Smith Prize for outstanding performance. He writes a blog on behavioural finance.

48 thoughts on “A Primer on Behavioral Finance (courtesy of Aberdeen standard)”

  1. Pingback: cialis pill

  2. Pingback: cialis for sale

  3. Pingback: cialis 5mg price

  4. Pingback: Viagra australia

  5. Pingback: Buy viagra australia

  6. Pingback: when will cialis go generic

  7. Pingback: cialis no prescription

  8. Pingback: cialis for sale

  9. Pingback: cialis india

  10. Pingback: viagra 100mg

  11. Pingback: viagra for sale

  12. Pingback: viagra generic

  13. Pingback: ed meds

  14. Pingback: erectile dysfunction medicines

  15. Pingback: online ed pills

  16. Pingback: generic cialis

  17. Pingback: canada online pharmacy

  18. Pingback: canada pharmacy

  19. Pingback: Buy cialis online

  20. Pingback: generic cialis online

  21. Pingback: generic vardenafil online

  22. Pingback: vardenafil 10mg

  23. Pingback: vardenafil online

  24. Pingback: casino

  25. Pingback: real casino online

  26. Pingback: sildenafil citrate

  27. Pingback: real money online casinos usa

  28. Pingback: casino online slots

  29. Pingback: no credit check loans

  30. Pingback: no credit check loans

  31. Pingback: cash advance

  32. Pingback: viagra for sale

  33. Pingback: best real money online casinos

  34. Pingback: usa online casino real money

  35. Pingback: real money gambling online usa

  36. Pingback: casino online slots

  37. Pingback: cialis buy

  38. Pingback: cialis internet

  39. Pingback: generic cialis

  40. Pingback: generic cialis

  41. Pingback: best online casino for money

  42. Pingback: real money online casinos usa

  43. Pingback: doubleu casino

  44. Pingback: viagra pill

  45. Pingback: order viagra

  46. Pingback: cheapest viagra online

  47. Pingback: cialis pills

  48. Pingback: sildenafil 100 mg tablet cost

Comments are closed.

Scroll to Top