Sadly most financial decisions are made based on irrational or insufficient analysis of data thus leading to irrationality.
Behavioral Finance combines behavioral and cognitive psychology theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.
Our second lesson will be on the concept of Herding….Herding is the tendency for individuals to copy and follow the actions (rational or irrational) of a larger group.
So imagine you go to a party and everyone is talking about this gold investment they have just invested in, everyone. you are normally risk adverse, but you reason in your mind that so many people cannot be wrong to invest in this gold so you take comfort in the “safety” of crowds and also invest.
With herding the lines between expert advise is blurred by the tendency to follow the crowd, not be left out of the latest investment trend. In herding, analytical reasoning is diminished, that is the danger
Key lessons on Herding
For the Investor: Study the investment carefully on its own merits,. remember every investor has different levels of risk acceptance. Referrals are just that…a referral to you. do your own due diligence.
(Image: Pinkerton Wealth Management)
