Now that the emotionally charged US Presidential election is over (along with all the media hoopla and guru predictions), we turn to the most significant factor in your evidence-based investment strategy: the human factor. In short, your own impulsive reactions to market events can easily eclipse any other investment challenges you face.
Exploring the Human Factor Despite everything we know about efficient capital markets and all the solid evidence available … we’re still human. We’ve got things going on in our heads that have nothing to do with evidence and rationality.
Historically, these primordial instincts have served us well. Our prehistoric ancestors depended on them when being attacked by dinosaurs. Even today, our child’s cry brings us running without pause to think. These natural human instincts are not only good – they can actually foster our survival.
In finance, where the coolest heads prevail, many of our human instincts cause more harm than good. If you don’t manage them when they occur, your own brain can trick you into believing you’re making rational decisions when you are, in fact, being high-jacked by ill-placed “survival” instincts. As William Bernstein, MD, PhD, said: “Human nature turns out to be a virtual Petrie dish of financially pathologic behavior.”
Behavioral Finance
There is a growing field of evidence-based inquiry known as behavioral finance. What happens when we stir up that Petrie dish of financial pathogens?
Wall Street Journal columnist Jason Zweig’s “Your Money and Your Brain” provides a guided tour of the findings, describing what happens in our brains to generate illogical financial decisions. To name a couple of examples:
When markets tumble – Your brain’s amygdala, the trigger point for the fight or flight response, causes fear to take over and every instinct screams “Sell!”
When markets soar – Neurons in the reflexive part of your brain fire up. Greed takes over convincing you to “Buy Now!” or miss the boat.
An Advisor’s Greatest Role: Managing the Human Factor
Beyond these market-timing instincts that lead you astray, your brain cooks up plenty of other insidious biases to overly influence your investment decisions. To name a few, there’s confirmation bias, hindsight bias, recency bias, overconfidence, loss aversion, sunken costs and the herd mentality.
So, managing the human factor in investing is another way an evidence-based financial practitioner adds value. By recognizing when clients are falling prey to a behavioral bias, we can “ hold up a mirror for them” so they can see it too. This allows the client to return to their evidenced-based financial plan which is in service to their most cherished financial goals.
At Align Wealth Management, our job is to help you make the most of your one financial life. It’s who we are. It’s what we do.
Thanks for taking a look!
Brian Puckett “Don’t you deserve a fiduciary advisor that puts your interest first and backs it up in writing? Call now for your FREE consultation.” (727) 455-0033
Please note: Brian Puckett is affiliated with Align Wealth Management, a Federally Registered Investment Advisor. This article is for educational purposes only and is not intended as investment advice or a solicitation thereof. The views herein are those of Brian Puckett (not Paradise News) and are subject to change without notice.
While all information is believed to be from reliable sources, we can make no representation as to its completeness or accuracy. Certain material in this work may be proprietary to and copyrighted by third parties and is used by Brian Puckett and Align Wealth Management with permission. Reproduction or distribution for commercial purposes is prohibited. Please remember that all investing entails risk.