People love to dream, they dream of the big pay-off, winning the lottery, a forgotten uncle leaving them a fortune in their will, finding gold or making a fortune on a speculative share.
Why else do we spend so much on lottery tickets when the odds are against us? Only around 60% of lottery ticket sales are redistributed in winnings and this is before you even count the odds of having the winning ticket. This is not the basis for a sound decision.Continue reading
The Undoing Project by Michael Lewis tells the story of the deep friendship and intellectual collaboration between the two Israeli psychologists who invented “behavioural economics”, Daniel Kahneman and Amos Tversky.
The result of Kahneman and Tversky’s “bromance” was not only behavioural economics but the establishment of the cognitive rules for human irrationality that has arguably done as much to define our world.
Timing is important when it comes to making sound financial decisions as is emotional intelligence.
Emotional intelligence is the ability to recognise your emotions, and understanding their effect on your decisions can lead to better decision making.
It can also be argued that investors who fail to recognise and manage their emotions effectively, are in danger of making poor judgements in the first place, or of overreacting later when things don’t go as initially anticipated.
Behavioural economics or behavioural investing is a relatively new science. There are plenty of cognitive biases people have which don’t always lead to the most optimal or rational decision.
The most recent recipient of the Nobel Prize for economics was Richard Thaler for his work in pioneering behavioural economics.
His research showed people do not always make rational decisions. This contradicts economic theory which relies on people making rational decisions.
His studies showed people often make decisions that don’t serve their best interests and do so consistently. He brought economics and the psychological analysis of decision making together.
It is said that money can’t buy you happiness but as with all simple question or statements it depends on a lot of variables.
Once you have satisfied your basic needs food, clothing, shelter having more money doesn’t necessarily buy you happiness. One study famously found that people who had big wins on the lottery ended up no happier than those who had bought tickets but didn’t win. One way of accounting for this is to assume that lottery winners get used to their new level of wealth, and simply adjust back to a baseline level of happiness, something called the “hedonic treadmill”.Continue reading
Over my 25 years of providing investment advice I’ve found it fascinating observing the psychology of investors. Why do people invest their savings in the first place and why do people make particular investment decisions?Continue reading