Behavioral Finance uses psychological theory to provide explanations for why people make financial and investment mistakes.
Behavioral Guidance can help prevent investors from being their own worst enemies, with advisors acting as a “barrier” or sounding board for financial decisions.
A few examples to explain behavioral finance are;
Overconfidence – Thinking one is a better investor then they actually are. Over emphasizing the possibility of good outcomes or underestimating the possibility of bad ones.
Hindsight Bias – Believing unpredictable past events, in retrospect, were obvious, and predictable.
Being short-term focused.
Regret – Previous poor outcomes can make you more risk averse, and affect future investment decisions.
Hot-hand fallacy – Desire for the “hot” stock.
