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Behavioral Finance 101 (Part 5)

Key Points

  • Statistically, it’s sensible to take a wager if the odds are in your favor.
  • Nevertheless, the bias of Loss Aversion notes that individuals will carefully consider the magnitude of potential losses relative to the gains before making such a bet.
  • This notion and many others are based upon the pioneering work of Amos Tversky and Daniel Kahneman, two highly influential researchers in the field of behavioral economics.

Continue reading → Behavioral Finance 101 (Part 5)

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Behavioral Finance 101 (Part 4)

Key Points

  • Initial bad experiences can lead us to avoid taking risk even when risk-taking can provide substantial benefit.
  • This is Primacy Bias at work, once again; and its impact can be significant to one’s long-term financial success.
  • When making investment decisions, a great way to combat these types of behavioral distortions is to conduct a complete (beginning, middle, and end) analysis of one’s investments.

Continue reading → Behavioral Finance 101 (Part 4)

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Behavioral Finance 101 (Part 3)

Key Points

  • First impressions matter; whether we like it or not, they guide our behavior and impact our decisions.
  • Furthermore, sometimes our initial judgements are incomplete or based upon a partial understanding of the facts.
  • Primacy Bias is the notion that we often overemphasize initial events over longer-term averages when making decisions about uncertain future events.

Continue reading → Behavioral Finance 101 (Part 3)

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Why Invest Forever? (Part 3)

Key Points

  • Since 1973 the S&P 500® Index has posted considerable gains—over this period the index has averaged over 10% per year in gains after reinvesting dividends, before taxes and fees.
  • However, investigating other 45-year periods (going as far back as 1871) leads to a more useful picture of the index’s performance across differing economic environments.
  • According to history, it’s better to invest in the index over longer periods in order to increase the likelihood of providing favorable returns and decrease the likelihood of losing money.

Continue reading → Why Invest Forever? (Part 3)