Behavioral Finance

by astanhaus

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My man becomes a nervous nelly before weddings. Mr. Style Savvy has even worn one navy and one black sock. Thankfully, I caught this mismatch before any damage to his picture perfect reputation was done.

Fingers crossed, he’s too busy thinking that could be us one day. And like clockwork, by the time we are on the dance floor, we’ve danced his worries away!

I don’t blame him. Thinking about the past and the future can bring out the weirdo in all of us. And we can become total wakadoodles when we contemplate the past/future of our finances.

A Random Walk Down Wall Street’s chapter on behavioral finance is as eye opening as He’s Just Not That Into You.

Random Walk Takeaways:

“There are four factors that create irrational market behavior: overconfidence, biased judgements, herd mentality, and loss aversion.”

“It seems that other people’s errors actually affect how someone perceives the external world.”

“Losses are considered far more undesirable than equivalent gains are desirable”

“Many behavioralists believe that overconfidence in the ability to predict the future growth of companies leads to a general tendency for so-called growth stocks to be overvalued.”

Obviously true assertions:

“Men typically display far more overconfidence than women, especially about their prowess in money matters”

“Male investors traded much more than women, with correspondingly poorer results.”

Action plan:

1. Avoid herd behavior

2. Avoid Overtrading

3. If you do trade: Sell losers, not winners

Thanks A Random Walk Down Wall Street for the tips. Here is the copy I read.

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(Originally published on Amanda Stanhaus’s financial literacy blog: XO, Bettie.)