Finance & Investments

Understanding Behavioral Aspects of Financial Planning and Investing

People often view financial planning and investing as overwhelming, intimidating, and scary, especially if they must tackle these tasks on their own. They are fearful of making costly mistakes that could influence both their present and future financial well-being. Their trepidation often stems from a lack of background, education, or experience to help them adequately cope with the financial side of living. In reality, the world of financial planning and investing can be highly complex and difficult. What should investors do?
Investors sometimes find themselves in a similar position as Alice in Lewis Carroll’s Alice’s Adventures in Wonderland who, when coming to a fork in the road, asks the Cheshire Cat:

Alice: “Would you tell me, please, which way I ought to go from here?”
Cat: “That depends a good deal on where you want to get to.”
Alice: “I don’t much care where.”
Cat: “Then it doesn’t matter which way you go.”

Unlike Alice, investors should make decisions based on their goals and then determine the appropriate path to get there.

A large part of investing involves investor behavior. Emotional processes, mental mistakes, and individual personality traits complicate investment decisions.

Investors often allow the greed and fear of others to affect their decisions and react with blind emotion instead of calculated reason. In fact, emotions can help explain asset pricing bubbles and related market behavior. According to the old investment adage, investors can make money as a bull or a bear but not as a pig. In short, investors need to understand the psychology of financial planning and investing. Investor behavior often deviates from logic and reason.

Read more about this in Money, Money, Money Ain't it Funny.

Source: Journal of Financial Planning