Latest news with #behavioralfinance
Forbes
07-07-2025
- Business
- Forbes
Why Advisors Should Start With Behavioral Finance During Planning
Gianluca Sidoti is an Independent Financial Advisor, Founder of TraDetector and Managing Partner at The Wealth Company International. Imagine walking into a doctor's office, and instead of asking about your symptoms, the doctor hands you a generic prescription that 'works for most people.' You'd be concerned—and rightfully so. Yet this is exactly what happens every day in the world of finance. Investors are handed prepackaged solutions without anyone considering their behavioral profile, biases, emotional responses or decision-making patterns. As an independent financial advisor who has worked with hundreds of clients across Europe and the Middle East, I can say with certainty: Behavioral finance is the missing foundation in most investment plans. The Human Side Of Money Traditional finance assumes that people are rational agents optimizing expected returns. But anyone who's watched investors panic-sell during a market drop knows this isn't reality. People invest with emotion, not spreadsheets. Over the years, I've encountered investors with wildly different reactions to the same market event. One client, a retired doctor in Milan, saw the Covid crash in 2020 as a golden buying opportunity. Another, a young engineer in Dubai, liquidated his entire portfolio at the bottom. Same market, opposite behavior. The Cost Of Ignoring Behavioral Factors Too many investors lose money not because their investments are bad, but because their behavior sabotages them. They panic during volatility and overestimate their ability to time the market. According to Dalbar's research, the average investor underperforms the market by a significant margin primarily due to emotional decisions. I once worked with an investor who was fixated on checking his portfolio daily. He became obsessed with short-term losses, even in a long-term retirement plan. We worked together to restructure his dashboard to show only quarterly performance, and we agreed on a 'no-login' rule during market turbulence. His results improved, because his behavior changed, not the portfolio itself. Financial Plans Fail Without Emotional Fit Even technically sound investment strategies can fail when they are emotionally unsustainable. A portfolio that's optimized for return but leaves you awake at night is, in my view, a failed portfolio. This is where behavioral profiling becomes essential for advisors. At our firm, we run clients through simulations that test their reactions to hypothetical drawdowns, unexpected expenses or even peer pressure. One tool we use is a 'Loss Aversion Challenge,' where investors are asked how they'd react if their 100,000 euro portfolio dropped by 20,000 euros in two weeks. Their gut response reveals more than any multiple-choice form ever could. Biases: The Unseen Enemy Every investor carries cognitive biases: overconfidence, anchoring, loss aversion, confirmation bias—you name it. And they have real-world consequences. Take, for instance, one client, an entrepreneur in his 40s, who refused to sell a losing stock because 'it would recover.' He was anchored to the purchase price. Eventually, the stock became worthless. Once we worked through the psychological barrier and reframed the concept of 'loss,' he became far more decisive and rational in his portfolio rebalancing. Another investor, a retiree, only invested in companies he recognized from the news. This familiarity bias led to a concentrated, unbalanced portfolio. Through education and exposure to evidence-based strategies, he diversified and reduced his risk—while maintaining emotional comfort. Behavior-First Planning For advisors who want to switch to behavior-first investment planning, here's how it can work in practice: 1. Start with client self-awareness. Use tools rooted in behavioral finance to help clients understand their emotional triggers and financial personality. 2. Incorporate investor emotions into goal alignment. Instead of asking 'How much do you want to save?' ask your clients, 'How do you want to feel when you retire?' or 'What scares you most about investing?' 3. Stress-test through scenarios. Model adverse situations—market crashes, job loss, inflation spikes—to evaluate how clients would react, not just how their portfolio would perform. 4. Provide ongoing coaching. Behavioral change doesn't happen overnight. That's why it's so important to schedule regular check-ins, not just for rebalancing portfolios but for rebalancing mindsets. The Advisor's Role In The Age Of AI With the rise of robo-advisors and AI tools, many ask if human financial advisors will become obsolete. I believe the opposite. Technology can execute trades, optimize allocations and automate savings. But it cannot coach behavior. It can't listen to a client's fear during a crisis or help them navigate a life transition. My vision of the future is hybrid: AI for efficiency, human advisors for empathy. Final Thoughts Behavioral finance should not be an afterthought or a side topic. It should be the starting point of every financial plan. Without understanding human behavior, the best strategy on paper can become a disaster in practice. Investing is not just a numbers game. It's a game of emotions, discipline and decisions made under uncertainty. As advisors, our job is to guide clients not only toward better portfolios—but toward better behaviors. That's how real wealth is built: with a plan that understands the person behind the money. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
Irish Times
10-06-2025
- Business
- Irish Times
You never forget your first time investing, study finds
It seems you never forget your first stock. A new study, Love at First Trade, finds people form a surprisingly strong attachment to their debut stock – even when it doesn't love them back. Researchers analysed trading records of Chinese retail investors from 2013 to 2016 and found a persistent 'first stock bias'. Investors kept buying their first stock again and again – more often, and with more money, than any other. This held true whether it had made or lost them money. Some investors even chase stocks in the same industry, hoping lightning will strike twice. It rarely does: returns from rebuying the first stock tend to underperform. READ MORE Men are especially prone, particularly if their first trade was a winner. Experience is no cure: seasoned investors were more biased, not less. The primacy effect is well known in psychology. This study shows how stubbornly it shapes portfolios. 'First love is often beautiful, yet blind – and sometimes painful,' the authors conclude. The same, it seems, goes for that first trade.
Yahoo
25-05-2025
- Business
- Yahoo
Saving Every Dollar for Retirement Is Just Silly — Why You Should Spend on Enjoying Life Now
Saving for retirement is important, of course, but saving every spare dollar for that purpose can actually create imbalance, 'especially when it starts to rob your present life of joy, meaning or opportunities for growth,' according to Melissa Murphy Pavone, a financial planner at Mindful Financial Planners. Read Next: Find Out: There are other considerations that should go into thinking about how you spend for the future and for today. Pavone and Robert R. Johnson, PhD, a certified financial advisor and professor of finance in the Heider College of Business at Creighton University, suggested you have to be flexible and strategic in approaching your spending. The big challenge for any person who has enough financial stability to both save for the future and spend leisurely in the present is how to balance that. Johnson pointed to the study of behavioral finance, which shows that 'human beings aren't rational profit maximizing machines but often succumb to behavioral biases.' One of the biggest behavioral biases, of course, is the bias toward immediate gratification over delayed gratification, he said. Because so many people tend to struggle to 'imagine their future self and give up that vacation or new car today in lieu of having money to retire on in the distant future,' most financial advice urges people toward doing the more diligent thing. However, Johnson pointed out 'the same can be true in reverse if one doesn't enjoy life in the present state and sacrifices current pleasures for future pleasures. The result can be mentally debilitating.' Be Aware: Pavone agreed. She has worked with people who are 'maxing out every retirement account but feel burnt out, disconnected from their families or frustrated because they're missing out on meaningful experiences.' Her advice is that, if you're always living in a 'someday' mindset, you might miss the very moments that make life rich. Pavone said it's best to strike a balance between 'living well today and being prepared for tomorrow.' That balancing act of 'honoring your past, investing in your future and living mindfully in the present,' is what most investors need to navigate. The goal of a thoughtful financial life isn't just to retire early, it's to live fully at every stage, Pavone said. 'That means aligning your investments, both financial and emotional, with what truly matters to you.' So long as you are financially stable, and have the luxury of extra dollars to spend, Pavone suggested you ask yourself the following questions. What do you value most right now? What brings you joy, purpose or peace? What are your biggest fears and are you trying to out-save them? The trick is determining how to tie available discretionary income to these questions without sacrificing future goals. Pavone uses a strategy she called 'financial modeling' to create 'permission' for intentional spending today without jeopardizing retirement security. 'Often, it's not a matter of either/or, it's about setting boundaries, creating margin and making sure the right dollars are going to the right places,' she suggested. This often looks like building in 'fun funds' or 'lifestyle reserves' into retirement models, so spending on joy is planned, not guilt-inducing. An area where spending now can pay big dividends later is on health and fitness, Johnson said. 'If one can improve their physical fitness, it can lead to better health in retirement and require less spending on healthcare in retirement,' he said. Additionally, though it might not seem as 'fun,' Johnson said that establishing a relationship with a qualified and credentialed financial advisor 'can be money well spent' because it helps you determine if you're on the right financial path. Living well today doesn't mean sacrificing your future, if you plan with intention. A balanced financial life makes space for both smart investing and meaningful spending. More From GOBankingRates These 10 Used Cars Will Last Longer Than an Average New Vehicle Sources Melissa Murphy Pavone, Mindful Financial Partners Robert R. Johnson, Creighton University This article originally appeared on Saving Every Dollar for Retirement Is Just Silly — Why You Should Spend on Enjoying Life Now
Yahoo
11-05-2025
- Business
- Yahoo
Behavioral Finance 101: 7 ways your brain can sabotage your finances
Have you ever avoided checking your bank account balance because you're afraid of what you'll see? Or splurged on an impulse purchase against your better judgment? You're not alone. Our emotions can take over and lead us to make questionable money decisions. Understanding why this happens — and how to prevent it — begins with understanding behavioral finance. This embedded content is not available in your region. Behavioral finance is a field of study that explores how psychological factors influence financial decisions. 'It explains why people often make financial decisions that defy logic — like overspending, avoiding bills, or staying in debt cycles — not because they're irresponsible, but because emotions like fear, shame, and stress are driving the behavior,' said Nathan Astle, a certified financial therapist. 'It's about understanding the 'why' behind our choices, not just the numbers.' People tend to have certain cognitive biases, which can negatively impact their financial decisions. Common biases include: This is the psychological tendency for individuals to strongly prefer avoiding losses over achieving equivalent wins. For example, losing $100 typically feels more emotionally painful than the pleasure felt from gaining $100. 'Our decisions and actions with money tend to be driven by the fear of losing it rather than taking the risks needed to grow it,' said Dr. Dan Pallesen, a certified financial therapist. That often causes people to make overly conservative, or even irrational, decisions with their money. For instance, you might hold on to a stock that's losing value longer than you should to avoid realizing a loss, even though you'd be better off selling it and reinvesting the money in a stock that's performing well. Overconfidence bias is the belief that you know more about a particular subject than you really do. This can lead to making uninformed financial choices, such as taking on too much investment risk without proper research or ignoring a financial advisor's recommendations. In other words, overconfidence bias can lead to expensive mistakes because your decisions are based more on self-assurance than objective analysis or hard evidence. This is a cognitive bias that causes you to rely too heavily on the first piece of information you receive, and it serves as the 'anchor' for all future decisions. There are several ways anchoring bias can play out regarding your finances. For example, let's say you want to purchase a home, and you see a listing for a house with a recent price reduction. You might feel compelled to put an offer in on this particular home because you're getting a good discount and saving money. However, further research may uncover that the property is still overpriced for the market or requires costly repairs that would cancel out any perceived savings. As an investor, anchoring bias can occur when you focus on a stock's initial purchase price or recent highs, influencing you to hold a losing investment in hopes that it will rebound. It's human nature to do something simply because everyone else is, like buying the latest iPhone when your current phone works just fine, or waiting in line for hours to try a new restaurant because it's gone viral on social media. This is known as herd mentality. But when it comes to your finances, hopping on the bandwagon can cost you. For example, during a stock market rally, people may rush to invest out of fear of missing out, and during a downturn, they might panic-sell just because others are — regardless of whether it makes sense for their investment portfolio or risk tolerance. Familiarity bias happens when people prefer things they recognize or understand easily versus situations that are new or complex. That's not always a bad thing, but when it comes to finances, familiarity bias can lead people to ignore better options in favor of what feels comfortable. For example, you might stick with a traditional savings account from the national bank where you opened your first account 20 years ago, even though you could earn 10 times more interest on your savings by switching to an online bank. This refers to the habit of treating money differently depending on where it came from. For example, you might receive your biweekly paycheck and immediately divide it into various budgeting categories to avoid overspending. But when you get your end-of-year bonus or tax refund, you're more likely to spend that money freely without factoring it into your budget — even though it's still income you worked for. The gambler's fallacy is the belief that past events influence the probability of future outcomes in random situations. It's based on the concept of a gambler who's had several consecutive losses and believes they're "due" for a win — so they increase their bet, even though the odds haven't actually improved. For investors, this can mean holding onto a stock because a series of losses means it is likely to rebound soon, or selling a stock because it's been up too long and is likely to plunge soon. Ultimately, this is due to the nature of human emotions and a deeply rooted way of processing them to protect ourselves. 'Our minds are not wired for what we would consider good money decisions today. Our minds are wired for survival,' Dr. Pallesen explained. 'Our ancestors survived with minds that helped them avoid danger and binge the resources available to them in the moment. It is no different today with money.' Allowing emotions to take the driver's seat when managing money is a dangerous game. It can impact your spending, saving, debt management, investment decisions, and more — ultimately keeping you from reaching your financial goals. But if emotions get in the way of sound financial decisions, it's not entirely your fault. 'We're not rational creatures when it comes to money; we're emotional,' Astle said. 'Many people carry 'money stories' shaped by early experiences, cultural expectations, and even generational trauma.' For example, Astle said, if you grew up watching your parents argue about money, you may subconsciously avoid budgeting as an adult. However, you can take steps to change these behaviors. 'Real financial change starts when we recognize those patterns and create space for new, healthier behaviors,' Astle noted. We asked experts for their best tips on overcoming emotions and behavioral biases to make smarter financial decisions. Here's what they said. If you're saving for a specific goal, such as your child's college tuition or a family vacation, name your savings account to reflect it. That way, whenever you log into your bank account, you get an extra boost of motivation to continue saving for that goal. Pallesen said visual cues are also a good way to inspire you to save and remind you of what's important. For instance, look at pictures of your kids before discussing household finances with your partner. Tape a picture of your favorite hobby to your computer monitor as a reminder of what you're looking forward to in retirement. Create a vision board with a friend to see and reinforce the things and values you're striving for in your life. It's common to focus on losses, but try tracking your wins as well. 'A lot of people will monitor their account balances, but they are often reviewing things that are out of their control, like stock market movement,' Pallesen said. 'Instead, track your savings rate and compare it against your past.' For example, he said, if you're currently saving 10% of your income this year, see if you bump that to 15% by the same time next year. Then track your progress in a spreadsheet or journal. 'Tracking and seeing progress is a great way to build momentum of healthy financial habits,' Pallesen added. If you're debating an impulse buy, take a beat and put the purchase on pause for 24 hours. This gives you time to consider why you feel you need it and whether you can truly afford it. After some time, you may decide that the purchase isn't worth it, helping you avoid making an impulsive decision you'll regret later. Don't be afraid to seek help from a trusted friend or financial therapist to help you navigate complicated feelings related to your finances. They may be able to help you see things from a different perspective and offer solutions to help you overcome these hurdles. It's common to fear the unknown, but avoiding your bank account balances and budget will not help you feel secure in your money management. 'Make time for a short, guilt-free check-in with your finances,' Astle said. 'Light a candle, grab a snack — remove the dread and replace it with consistency and care.' Read more: 5 psychological money hacks to cut spending and increase savings
News.com.au
08-05-2025
- Business
- News.com.au
Dane Burkholder: Serving Athletes and Building Trust Through Education
"We never approach these relationships talking money management first," says the managing partner of Roseville Wealth Management. "We approach it with behavioral finance, building out a game plan, understanding the options and providing education."
