Behavioral Finance: Recognizing Fear, Greed and Other Irrational Investing
Market drops bring out the fear factor in investors, just as market gains elicit greed. But as we explain in this recent paper on behavioral finance, only by recognizing emotional bias and faulty logic can an investor steer clear of making decisions driven by fear, greed or other biases, which ultimately lead to selling low and buying high.
The recognition that investors are often irrational is the basis for behavioral finance, which attempts to explain market movements using social and psychological factors, as well as financial theory. The topic has garnered significant press as of late, especially after Richard Thaler won the 2017 Nobel Prize in Economics for his work on how investors are “predictably irrational.”
At Laird Norton Wealth Management, we believe behavioral finance is key to improving investment outcomes and have incorporated it into how we evaluate the asset managers we use in client portfolios, and ultimately, how we make investment decisions.
Read our Q4 2018 Economic Outlook here.