That your behavior affects everything in your life, you should already know. But do you already know how your investor behavior affects your financial investments?
We make a lot of decisions every day, some of them involve money, some don’t. Regardless, you definitely want to make the best decisions for your life. And understanding how investor behavior can influence your financial success will make you make more rational choices.
Therefore, we have prepared this article for you to learn how to develop a behavior that will help you make more assertive decisions regarding money. Let’s go!
After all, what is investor behavior?
We can say that investor behavior is the way of acting that guides, even if unconsciously, someone who invests . That is, you make decisions based on social, emotional factors and beliefs built throughout life, even if unconsciously.
If we understand how and why we act in a certain way, we can learn to make decisions more rationally instead of just driven by emotions. Our brain tends to look for safer and more known answers, without taking into account the data, numbers and information that could guide us down another path.
You will be able to follow your financial planning even if your emotions tell you otherwise.
Nowadays there are several behavioral finance studies that try to unravel the “mystery” behind each choice. Behaviors linked to finance are divided into biases, or mental shortcuts.
Let’s talk a little more about that.
What are behavioral biases?
Studies on behavior within the finance segment have been advancing and seek to answer the question: how do some investors achieve great results and others do not?
The answers can be varied and the reasons too. But one of them concerns behavioral biases, or rather, how behavior affects financial decisions, leading the individual to be moved by emotions .
And when we talk about behavioral biases, we are also referring to early judgment and misperception in certain situations. Confused! Let’s explain.
Here we are talking about being “emotional” and putting evidence and data aside to just follow your heart. Acting a different way each day depending on how your mood is.
In the case of investments, the ideal is to understand how your emotions interfere with your decisions so as not to make choices that hinder your achievements .
– Anchoring: surely you have heard the saying several times, the first impression is the one that lasts. Well, that’s what this bias is about. It’s when you use initial information to make a decision.
– Availability heuristic: in this bias, decisions are based on personal experiences. For example, you made an investment that did not yield as expected, then when they suggest you do that application again, you do not do it, because you already had a bad experience.
– Loss aversion: It is that investor who runs away from risk anyway, even compromising profitability. Here it has a little to do with a conservative profile , that person who seeks safer investments.
– Recency bias: investor behavior is based only on recent and immediate facts. The history is left aside analyzing only the moment.
– Familiarity bias: choosing what is already known, avoiding the discomfort of something new.
– Overconfidence: the more experience you have, the more confident the investor becomes. This is good, but it can turn into a trap. Overconfidence does not allow the person to reflect on the decision and loses the ability to scale the business risks.
– Confirmation bias: in this case the investor uses the numbers to say he is right. Using only studies and sources that confirm your opinions without being willing to listen to new trends.
– Gambler’s fallacy: this is a tricky bias to understand, but it works like this: the investor makes his decisions based on probabilities. In a dice game the same number can land three times in a row, so the player is confident that he will land a fourth time on the same number. Nothing guarantees that this will happen, but the investor has complete confidence that it will happen again. This is how the gambler fallacy bias works.
As you can see, these behaviors can be identified and used to your advantage when investing. Let’s talk a little more about how these behaviors impact financial investments.