Rational Investing Despite Irrational Behaviors

Opiela, Nancy
January 2005
Journal of Financial Planning;Jan2005, Vol. 18 Issue 1, p34
Academic Journal
This article identifies the most common behavioral patterns and issues that impair financial decision making, and shares strategies for helping clients temper their emotions and succeed in making rational investment decisions. Planners say that problem number one for many new clients is procrastination. And it often comes, they say, from a combination of optimism that leads us to believe that no matter what we have to overcome, it will all work out okay in the end, overconfidence in our own abilities, and information overload. While clients' financial decision making certainly can be impaired by their own upbringing, the media also plays a role in creating an unhealthy decision-making environment. Planners also note that in a corporate setting, this problematic optimism can translate into what is known in the field of behavioral finance as the herd mentality. In this case, executives of a company look at their prospects through rose-colored glasses and are certain in their positive assessment because the entire group feels the same way. Because losses always hurt psychologically more than gains, many clients choose investments such as certificates of deposit that appear safe, but may actually be losing money when inflation is factored in. This loss aversion is also at the root of the harmful practice of hanging onto stocks that have been hammered by the market.


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