As human beings, we feel – we have emotions. Being an effective investor, therefore, requires that we understand how our emotions can affect our decision-making about money, especially during volatile times. In fact, researchers analyze this correlation between emotions and investment decisions in an area now referred to as “Behavioral Finance” research.
In the markets, investing assumptions and “rules” are based on the idea that we as humans are going to react with dispassion and in the most logical way when change occurs. Looking at evidence and your own experience as a physician, you know this just isn’t true of most people. You’ve likely seen how an irrational patient’s emotions can drastically change their treatment and healing trajectory – even if they follow your clinical advice. In the markets, these behavioral elements and emotional responses cause booms, bubbles, and busts. Maybe you’ve even bought or sold an investment on a gut feeling? So how can you use this to your advantage instead?
The first step is awareness, the second (…the harder part) is adopting an objective perspective in pursuit of more successful investment outcomes.
Emotions can be fickle, fleeting, illogical, and contradictory, and there will always be sentimentality in money – how we spend it, what it means, and what it does for us. The key is recognizing as an investor when you are experiencing an emotional response and either seeking more knowledge and/or finding an advisor that you trust to help guide you impartially through emotional/financial decisions.
If you have questions or need help managing your financial future and all the emotions that come with it – give us a call.
For more on behavioral finance – read this great interview with Dr. Daniel Crosby: Behavior in Investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.