Behavioral Finance

Behavioral Finance is a fascinating topic. Although it appears that most of the scholarly research in this field has been directed towards analyzing the behavior of mutual fund managers and other institutional investors (that’s where the research money comes from) we are looking for and do find, from time to time, cognitive research that may be useful for improving your trading skills.

The extract below is not one of them, but still an informative piece for getting a handle on what behavioral finance is all about.

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Nearly all decisions, conclusions and actions people make are formulated in the subconscious brain, Ervolini says. “We help managers understand whether those persistent decisions are taking them farther down the road toward good decisions, or if they lead them astray,” he said.

For investors, the seeds of personal growth are planted in the field of behavioral finance, a discipline that studies the effects of emotions on people’s investment choices. Cabot Research relies heavily on behavioral finance theory to spotlight managers’ foibles. These judgment errors include overconfidence, selling winners too early, and giving themselves too much credit.

Complete article at MarketWatch