Insights

The Power of Choice

April 18th 2017

The power of choice is one of our most powerful gifts of free will, doubly so when it comes to our finances and investments. Once you’ve paid your taxes, it truly is ‘your’ money. You can choose to put it under your mattress, bet it all on Blackjack in Las Vegas (not a great idea), invest in a Systematic Investment Plan, or invest 100% of your paycheck in penny stocks (also not a great idea).

Having unlimited options is both a blessing and a curse -­ a blessing because it lets us do things like research, trial and error, and using our intuition; and a curse because it activates two critical blind spots in our general way of thinking: 1) that we love having the power of choice, and usually enjoy having more choices than less; and 2) we intuitively believe that the more choices we have, the more likely we are to find one that will satisfy our needs­ be they social, financial, or occupational.

To Trade or Not to Trade

March 27th 2017

If you’ve ever watched a news story, movie, TV show, or even stock footage about the way the stock market works, no doubt you’ve seen the frenetic pace at which traders on the floor buy and sell. It is intense, often incomprehensible, and also addicting to a certain segment of the population,­ both financial traders and laypersons, ­who consider themselves the type who can succeed in such a high pressure, high intensity environment.

While market research and gut feelings have their place in any financial transaction, being able to read human behavior when it comes to money, particularly financial behavior, can be the key between taking yourself or your client to the poor house or down Easy Street.

Behavioral Causes of the GFC

March 9th 2017

As incredible as it is to think about, we’re closing in on 10 years since the global financial crisis (GFC) of 2007 – 2008 that saw the housing market collapse lead to an almost complete breakdown of capital markets worldwide. Overnight several banks failed, with the rest forced to admit to a shaken public and a nonplussed federal government that they needed assistance to get back on their feet.

While the banks and many private citizens learned painful lessons during the collapse and ensuing recession, history continues to paint a fascinating picture of what happened to cause the bubble, particularly when it comes to the areas of psychology and behavioral finance.

Contribution of Kahneman and Tversky to Behavioral Finance

Economic theory is often just as stodgy as it sounds;­ models and theories and rationales about the way people buy, sell, trade, spend, and save. So imagine the reaction in 1979, when Daniel Kahneman and Amos Tversky first presented their own hypothesis, called Prospect Theory, that people do not make financial decisions based solely on maximizing their potential wealth, but rather see the world in terms of gains and losses, and will largely avoid any decision that risks losing what they already have.

The crux of this theory lies in the idea that people will act irrationally to avoid feeling negative emotions, regardless of what economic models predict. The logic of the theory is that if you gave the average person two equal chances: one to win $10, the other to win $20 but then lose $10, they would take the option where they simply won $10, even though both options have the same net result.

Financial Therapy

Jan 16th 2017

Whilst Financial Therapy might sound like a cute name for a church meeting or a community center event that encourages singles and couples to get good advice on how to handle their finances, it’s a real field that took hold in 2010 with the founding of the Financial Therapy Association (FTA).

You ask, hold on a sec, what’s the difference between Financial Advisors and Financial Therapists? Generally speaking, Financial Advisors look more into how to manage your money to reach financial goals. Conversely, the task of a Financial Therapist is to delve into how to handle the financial problems and mistakes a person or family has already committed, and ones which they tend to repeat over and over again, often without being consciously aware of the pattern.