Human behavior when it comes to investing, three errors and three solutions

Human behavior when it comes to investing, three errors and three solutions

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  • By Joey Gladstone, Doctor and researcher at the University of Cambridge
Specialized in the theory of financial performance, it analyzes three trends in the behavior of investors, providing remedies for each.

1. Excessive optimism. According to Gladstone, people are too optimistic. They tend to underestimate risk probabilities and overestimate the chances of success. "If you are too optimistic it is likely to fall short when it comes to anticipate their future income needs because they think everything will be okay. And this, indeed, is not conducive to good or rational decision-making. Make a basic study may be useful in this case. They say knowledge is power and I think having some knowledge can help you make an objective comparison of what could be the real return on their investment decisions."


Source: Schroders incomeIQ

2. Trend projection. Many people project their emotions and preferences of today and assume that in the future will feel exactly the same. A study on the purchase of several million homes and cars gives us a great example of how the trend manifests projection. According to the findings of this study, when it is sunny most people buy convertibles and manors. Now the sun should not influence the decision because, obviously, is not taking the decision only for that day, but for many years to come. "Predicting future needs today is very difficult, but a way to make this task easier is to consider different future scenarios. Think ahead, in what could be their savings and income needs, "says Gladstone.


Source: Schroders incomeIQ

3. Tendency to present. The present trend relates to how people actually do not value things in the future as well as the value in this. "You must think of yourself as two different people: one who plans visionary and one that spends the short term," said Gladstone, "On the one hand, the visionary planner want to have income throughout their lives.. He is the angel of good conscience. And at the same time, short-term spends want things now. It is the devil of a bad conscience. The best way to achieve optimum results in your life is truly control spender that short-term and let the visionary planner take most of the decisions."


Source: Schroders incomeIQ