Behavioral Finance Challenges

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Mark Sherwin of Floor or New York Stock Exchange (NYSE)

Behavioral finance research shows emotions influence investor decisions, often to their detriment.

  • The most powerful emotion is loss aversion, which drives panic selling.
  • The second is herding, which drives return chasing and narrow framing.
    Investment plans are built with the best of intentions.

But investors often fall into behavior patterns that compromise long-term plans.

When Markets Go Up, Investors:

  • Chase returns and ‘buy high’
  • Narrowly frame decisions, taking on undue risk

When Market Crises Occur, Investors:

  • Experience loss aversion, leading to panic selling
  • Can’t hold on and ‘sell low’

We seek to directly address the causes of behavioral finance challenges, such as big losses and the uncertainty of the market.

After all, the best long-term investment plan is the one the investor can stick with.

Seek a Smoother Ride

The trouble with ‘buy and hold’ is that investing can be a bumpy ride, with unpredictable periods of severe losses.

That makes it difficult to hold on, causing many investors to ‘buy and fold’.

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