Skip to main content

  • Home
  • Home
  • Clients
  • Philosophies
  • Our Team
  • Contact Us 
    • Ask Us A Question
  • Affiliations
  • Blog
  • Financial Check-Up℠
  • Resources
    • Calculators
    • TD Ameritrade Account Login

    You are here

  1. Home
  2. Blogs
  3. Behavioral Economics: Part I

Behavioral Economics: Part I

Submitted by BCR Wealth Strategies on December 17th, 2018
  • Facebook Like
  • Google Plus One
  • Tweet Widget
  • Linkedin Share Button

Economics entered its modern sense in the nineteenth century, but economic thought certainly started long before that.  However, economists almost always started from the assumption that people would do what was in their own best interest.  In the last 20 or 30 years, some economists started to question this assumption.  From this was born the subject of behavioral economics, also known as behavioral finance. Behavioral economists defined several types of fallacies people carry with them when investing and they all lead to adverse economic behavior on their part, and thus poorer investment results than they otherwise deserve.  Some of these are discussed in this blog and will be continued in Part II.

Generally, these fallacies, or biases, occur because we tend to be emotional creatures.  Emotions are not good drivers of investment strategy.  You’ll notice that there is overlap amongst these, so don’t be surprised if you sense that.   

Overconfidence drives us to feel that we’re smarter than we really are and that we have more information than we actually do.

I know a fellow who assured me in 2015 that the European banks had not learned the lessons of the 2008 bank crisis, and this was certainly going to lead to another crash.  He invested heavily on the assumption that this kind of failure was imminent.  We all know that this second crash hasn’t happened – yet.  He was overconfident and thought he knew something that was true, and his overconfidence caused him to make a poor investment decision.

Confirmation bias is one I find I fall into easily.  It causes us to seek out information and articles that agree with our preconceived notions, rather than those that disagree with our preconceived notions.  I find I watch TV shows and read articles that support my political opinion far more than those I disagree.  In investment, we tend to read and absorb stories that support our preconceived notion of what will be a good investment. We endow a premium to what we agree with and heavily discount  that which we disagree.

If I believe the market will go up, I tend to feel better learning why my belief is correct, and ignore or disbelieve information that disagrees with that belief.

Unconscious biases are those that hide from us, making them difficult to come to grips with.  Are there certain investments that you avoid offhand or don’t even consider?  This may be because of unconscious bias.  Consider that many people invest only in US companies, or won’t consider emerging market companies.  Statistically, they may be losing out on investment opportunities because they haven’t even considered them.

Over-optimism or over-pessimism drives us to make investments, or avoid investments often based on limited information.  I’m sure that X will occur – I’m really sure –  I’m positive it will happen!  In 2008 and 2009 there were stories of people who mortgaged their homes and took the money designated for their children’s college education because they were sure, in 2006 and 2007, the market would keep going up.  But the fact is that it might not happen, or at least might not happen in the way you imagine, and for those people, it didn’t happen the way they were so optimistic it would.

The disposition effect drives people to sell their winning positions too soon and hold onto their losing positions too long.  This was discovered after analysis of trading that was done by investors at several stock brokers. 

What drives people to make these trading decisions?  I know of one fellow who owned about $1 million of stock in a major company.  The price of this company fell significantly and he’s waiting for it to “get back”.  Why does he think it will ever get back to the price it once had?

-Harold Sasnowitz

Tags:
  • Author- Harold Sasnowitz

Subscribe to Our Blog

Enter your email address:

Recent Blog Posts

  • Should You Invest to Get Income In Retirement? Not So Fast My Friend
  • Hiring the next Nick Saban
  • General vs Personalized Part 1

Categories

  • Author - Clay Wood (2)
  • Author - Harold Sasnowitz (1)
  • Author - Intern (13)
  • Author - Lindsay Birchfield (2)
  • Author - Mark Hume (24)
  • Author - Marshall Rathmell (6)
  • Author - Sandra Cleveland (3)
  • Author- Clay Wood (31)
  • Author- Harold Sasnowitz (29)
  • Author- Kristie Clayton (7)
  • Author- Marshall Rathmell (92)
  • Author- Sandra Cleveland (49)

Archived Blog

  • February 2021 (4)
  • January 2021 (4)
  • December 2020 (4)
  • November 2020 (5)
  • October 2020 (4)
  • September 2020 (4)
  • August 2020 (5)
  • July 2020 (4)
  • June 2020 (5)
  • May 2020 (5)
  • April 2020 (8)
  • March 2020 (6)
  •  
  • 1 of 7
  • ››

Contact Us

Ask Us A Question

 

Alabama

Phone: 205-298-1234
Fax: 205-298-1230

1952 Urban Center Parkway
Vestavia, AL 35242

Get Directions

New Jersey

Phone: 607-238-7718
Fax: 607-238-2859

22 Lenox Ave
Clifton NJ 07012

Get Directions

Affiliations

BCR Wealth is an independent firm that puts its clients’ interests first.  In order to maximize the value we provide clients we have affiliations and strategic alliances with other organizations including:


TD Ameritrade, Inc. is one of the firms that we use to custody our client assets. TD Ameritrade, BCR Wealth Strategies, and the other entities named are separate and unaffiliated firms, and are not responsible for each other’s services or policies. TD Ameritrade does not endorse or recommend any advisor and the use of the TD Ameritrade logo does not represent the endorsement or recommendation of any advisor. Brokerage services provided by TD Ameritrade Institutional, Division of TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Used with permission.

  • Sitemap
  • Legal, privacy, copyright and trademark information
  • Form CRS

© 2021 BCR Wealth Strategies LLC. All rights reserved.

Website Design For Financial Services Professionals