Posts filed under “Psychology”
Today’s column is going to wax a bit philosophical. Stay with me; I think it will be worth your effort.
You don’t really understand time. By “you” I mean humans in general.
This has great significance for investors. They often misapprehend time, are seemingly unaware of its importance, and can’t conceptualize it over the long term. Pardon the circularity, but you exist in the here and now, and — for want of a better phrase — are stuck in the short term.
The past is a hazy set of fallible memories and biochemical impulses, often tinted by the warm and rosy glow of nostalgia. The past can also be darker, traumatic, painful, repressed, still haunting its survivors. Those experiences, often mixed up with one another, color our perspective.
It’s no surprise that our experiences affect expectations for the future. Nor does one need much imagination to see the ramifications the past has for investors. Too many good experiences, or too many bad ones, will change the expectations and risk tolerances for those who put capital to work in risk assets.
When considering the future, it is important to recognize that if one considers a possible outcome it is merely one out of an infinite set of possible outcomes, all unknowable.
continues here: Time Is an Investing Ally, Not an Enemy
University of Chicago behavioral economist on stock markets, NFL drafts and the importance of trust Douglas Clement | Editor, The Region Published October 3, 2013 | September 2013 issue Interview conducted July 17, 2013 We are rational, self-interested optimizers: Homo economicus. So the neoclassical model of economics has held for over a century. It has been a fruitful…Read More
What do gold prices, a stock-market plunge and a credit crisis have in common? The way investors tend to see them are examples of the “recency effect.“ A brief description first: In human psychology, people who are asked to recall items on a long list tend to have a sharper memory of the items toward…Read More
The Psychology of Risk: The Behavioral Finance Perspective by Victor Ricciardi Goucher College – Department of Business Management Abstract: Since the mid-1970s, hundreds of academic studies have been conducted in risk perception-oriented research within the social sciences (e.g., nonfinancial areas) across various branches of learning. The academic foundation pertaining to the “psychological aspects” of risk…Read More
Most investors are (or at least should be) familiar with the concept of “Home Country Bias” — the natural tendency to be more familiar and comfortable with public companies in your home country. Investors everywhere consistently display this trait, which is in direct conflict with the basic principles of international diversification. A 2014 report by Vanguard found…Read More
The new “World Wealth Report” for 2015 was released last week fromCap Gemini and RBC Wealth Management. The focus is on the population of high net worth individuals, or HNWIs as the report calls them. The report, based on a survey of more than 5,100 wealthy people in 23 major markets, is packed with fascinating data and…Read More
Summertime is here. The days are still getting longer, the kids will soon be in camp, the beach beckons. With Memorial Day behind us, we have 12 weeks before Labor Day sneaks up on us. My goal each year is to read three books a month between the holidays that mark the unofficial start and…Read More