Weekly Comment – 4 Jan 16 : Time to retrain your investment brain
January 4, 2016
BEHAVIOURAL finance is
a relatively recent field that
combines psychology with
economics to explain why people
make poor financial decisions.
This is particularly relevant for the
growing number pharmacists who
have decided to manage their own
investments and super.
Nobel Economics Prize-winner
Daniel Kahneman in his 2011
book Thinking Fast and Slow,
showed that over the past 30
years the typical investor earned
an average annual return of just
3.7% compared to the market’s
11.1% return. Why? We are born
risk-averse, which leads to us forgo
profitable opportunities to avoid
the possibility of losses. Kahneman
discovered that we feel the pain
of losses up to 3x more than the
enjoyment of gains. This explains
why only 8% of Australians think
the share market is the smartest
place to invest savings compared
33% who favour cash. Shares are
less popular than they have been
for decades despite being the best
performing asset long-term.
This fear of losses is exacerbated by
availability-bias because we put too
much weight on the recent past.
We also exhibit overconfidence
in our own skills and an illusion of
control, which causes us to overtrade
rather than take a set-andforget
strategy that reduces costs
and stress.
Next time you make an investment
decision, consider whether your
choice has been impacted by
these behavioural biases, and if
so, whether it's really the best decision.
This week’s contributor is Chris Brycki, the Founder and CEO of Stockspot.
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