Financial advisers are relying more heavily on behavioral finance -- the study of how unconscious biases affect financial decisions -- to coax risk-averse investors out of cash and into the markets. Meanwhile, in academia, researchers are tracking how hormones hurt returns and using brain-imaging technology on scam victims.
John Coates, a senior research fellow in neuroscience and finance at the University of Cambridge, has a theory. He says there would be fewer stock market bubbles and crashes if women and older men handled most of the trading.
If going really wild means moving from a three-month Treasury bill to a one-year certificate of deposit, you’re probably suffering from Irrational Prudence Syndrome -- a syndrome financial firms dread, and one they are determined to cure.
Emotions can sabotage even the most rationally constructed portfolio. Academic studies prove that, and so does actual investor behavior. This graphic charts the erratic pace by which individuals put money into and took money out of mutual funds over 20 years.
Investors make lots of mistakes, but why? Blame the brain says Meir Statman, a finance professor at Santa Clara University. Statman explains that hindsight and over confidence are often the culprits. Fortunately, financial advisers are coming up with new ways to protect us from ourselves. (Source: Bloomberg)
Your Money & Your Brain: A (Rational) Reading List
You may feel in control, but you’re actually driven by neural “zombie systems” you’ll never even be aware of.
David Eagleman’s “Incognito: The Secret Lives of the Brain,” strips away the primacy of our conscious mind, exploring the underlying forces actually determining our choices.
Peter R. Orszag, the former White House budget director, was one of the Administration’s most prominent devotees of behavioral economics -- the study of what drives consumers to part with their money as they pick one product, retailer, or provider over another.
Financial markets aren’t utterly rational, almost perfect allocators of capital, argue Roman Frydman and Michael D. Goldberg in “Beyond Mechanical Markets.” Nor are they mere casinos stampeded by herds of irrational gamblers.
Most American households at or near retirement “are consumed by fear,” said Anthony Webb, associate director of research at the Center for Retirement Research at Boston College. “Instead of walking on the beach hand-in-hand in retirement, the reality is that they’re sitting around the kitchen table cutting coupons.”