You should understand the roles psychology and emotions can play in your investment decision-making. That’s where behavioral finance comes in.
How can psychology and emotions influence investment performance?
Investors may like to think they’re completely logical in their decision-making, but the fact is that psychology and emotions can play large roles—whether we’re aware of it or not—that can affect investment performance. That’s why it’s important to know about behavioral finance, which considers the role these factors often play in reaching financial decisions.
To comprehend the hidden forces that can influence how you manage your investments, you should understand that:
Investors are not always rational; both cognitive (thinking) and emotional (feeling) biases influence their decision-making.
Generally, it is easier for investors to correct cognitive biases than emotional ones.
Because it may be difficult for investors to correct emotional biases, it might be appropriate to use approaches to construct portfolios that include a qualitative or behavioral component.
To learn more, download your free guide on understanding behavioral finance.