Behavioural finance is an important aspect to consider when learning about investment decision making and wealth management as it helps us understand the how bias can influence success and failures.
Financial crisis often has an impact on our bias just as any crisis. The brain holds onto negative situations more than positive ones. Think about any negative situation in your life and how your may ruminate on it more than good memories. Therefore, looking back at decisions you made in finance and thinking about how bias will impact on what you notice can improve discernment and what you see.
The behaviours to watch in any situation and especially a crisis is when fear and greed influences decisions. Behavioural portfolio theory states that fear and greed influences investors decisions. Fear can cause the investor to diversify their portfolio in investments that are low in risk and low in savings while greed can influence investors to diversity heavily in high risk investments in the hope of high returns. As a result fear can cause investors to sell shares when a crisis hits as it is high risk. However, this activity may not be helpful if your long term goal is to improve your retirement plan. So while you notice the crisis around you and your emotions also consider your goals in your investment strategy.
While attitude influenced the 2008 financial crisis, the financial crisis in 2020 was caused by a different nature. However, attitude can influence how you manage it. While emotions can guide life, you also need to look at your strategy which would include your goals and objectives to make informed decisions when investing. If your investment strategy is to retire well, then you need to consider your long term goals, alternatively if it to live on then it would be a short term strategy.
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