Human behavior has been studied for hundreds of years to help us understand ourselves and each other on deeper levels. The wide scope of psychology helps us to make better decisions in our lives. In the expansive financial world full of wealth management processes and investment opportunities, it pays to know yourself from a behavioral finance standpoint, a flourishing perspective.
Find out how Behavioral Finance Biases affect your financial decisions. Work with a financial advisor in Norman, OK.
What is Behavioral Finance?
If you are unaware of your behavior, there is no way to alter that behavior. However, when you become aware of how you behave in response to financial situations, negative financial patterns can be avoided. In fact, by receiving proper professional support from a financial advisor, you can learn to replace those tendencies with rational decisions supporting your long-term financial goals.
Behavioral finance is linked to activities associated with budgeting, taxes, savings, banking, debt, credit, investments, capital markets, and more. If you have a tendency to react emotionally or have a mindset based on a particular bias, your financial wellness may be at stake.
When you experience a high-impact crisis that immediately impacts your investments, making the right financial decisions can feel confusing and scary. And when people react in fear, they go back to a programmed behavior or belief. However, by understanding behavioral finance and market cycles, you can make sound investment decisions.
How Does Behavioral Finance Differ From Traditional Financial Theory?
Traditional finance assumes that investors can be rational and process all information unbiased. Behavioral finance, on the other hand, relies on real-world experience where investors have biases that tend to be irrational, and emotions play a role in making investments.
Behavioral finance doesn’t just study an investor’s psychological point of view, but their sociology perspective. Socionomics believes that social forces drive political, economic, and financial trends, such as collective culture, social mood, financial markets, politics, and norms.
Since social mood fluctuations have a pattern, the type and character of economic and social events make it possible to forecast. In theory, socionomic causality is the engine of history.
How Does Behavioral Finance Compare to Socionomics?
Like behavioral finance, socionomic theory suggests that leadership and policies are basically powerless in shifting social moods and that their actions in the aggregate project social mood versus regulating it.
There’s a lot to consider when it comes to how and why you invest the way you do. Explore these aspects and get financial advice from TRAC Advisor Group Inc:
- Investor behavior
- Market psychology
- Trading psychology
- Cognitive errors
- Emotional reasoning
Examples of Behavioral Finance
One type of behavioral finance bias is called mental accounting, where people have the tendency to categorize money by putting different values based on mental accounts or subject criteria. Let’s go over a few examples to see if you can relate.
Using credit cards to build loyalty points is one example. When people use credit cards or other cashless transactions, they tend to pay more versus paying with cash and can recall purchase amounts more accurately.
Mental accounting includes tax refunds, insurance claims, money as a gift, and bonuses. Since these unexpected funds aren’t not factored into their financial plan or budget, people have a tendency to spend this money impulsively.
People tend to associate a higher monetary value with personal attachment items. When selling them, you may not understand why little money is offered.
Other types of behavioral finance biases include:
- Overconfidence bias
- Loss aversion
- Anchoring bias
- Regret aversion bias
- Limited attention span
- Chasing trends
- Herd mentality bias
For example, greed and fear commonly create overreactions, which means that you can sell overbought assets and buy oversold ones. Adopting a new strategy like buying when traders are panicking, picking up assets while they are cheaper, and selling when euphoria leads to bubbles, can be highly advantageous.
How Can Understanding Behavioral Finance Help?
Since the above biases may lead to bad decision-making, understanding it can help you choose differently moving forward. Financial planning and investment strategy go hand-in-hand, so reach out to work with an investment manager with your best interests above our own.
At TRAC, our financial advisory firm specializes in behavioral finance. There is no shame in practicing what you were taught, right? But if doing what you were taught is not helping your portfolio, it’s time to choose another route. When you know better, you can do better.
- Socionomics hypothesizes that internally regulated waves of social mood prompt social actions.
- Social causality accounts for the chronology so as to turn disagreeable perversity into harmonic compatibility.
- Behavioral finance is growing in importance as the basis of an investment methodology.
Don’t let behavioral finance biases like loss aversion hinder your retirement planning. Make sound, researched, and wise decisions based on reason and logic. By understanding behavioral finance, you can understand yourself better, to save for retirement, and hopefully leave a legacy to your heirs.
Explore your behavioral investing style with a wealth manager at TRAC Advisor Group Inc, a full-service, fee-based firm in Norman, Oklahoma. We have been providing independent investment advice and helping people withstand bear and bull market conditions with confidence with years of experience. Contact us today!
Get a straightforward, direct planning style you can trust. We will keep you on track toward your financial goals.
TRAC Advisor Group Inc. is a full-service, fee-based financial advisory firm in Norman, OK. We offer independent investment advice and help people withstand any type of market volatility with confidence.
As an independent investment advisor, we can offer alternative investments like numismatics and precious metals to diversify and hedge against uncertain times. With a straightforward and direct planning style, you can trust that we’ll keep you on track towards your financial goals.