Behavioural finance is a field of psychology created to explore this phenomenon and hopefully guide investors to make better choices.
Common investing traps
In a primer on the basics of behavioural finance, Sam Ro at Business Insider offers simplified explanations of the seven most common cognitive biases that trip up investors. In his words:
- Investors believe they are awesome at investing.
- Investors are bad at processing new information.
- Investors connect the wrong things to one another.
- Investors absolutely hate losing money.
- Investors have trouble forgetting bad memories.
- Investors like to go with the flow.
- Investors are great at coming up with excuses.
He offers a brief description of each trait so you can identify whether or not you’ve fallen into any of these investment traps.
Read more: 7 Ways Your Brain Makes You a Terrible Investor.
What happens in an investor’s mind?
Can you believe that when thinking about winning or losing money, your brain behaves similarly to someone who is high on cocaine?
That was the finding of a 1997 study, one of the studies cited in a TIME Money article about what brain chemical activity might be at play when we’re making investment decisions.
You know that stomach pain you feel when your money is at risk – it’s not in your imagination.
Read more: Your Brain Does Really Weird Stuff When It Thinks About Money.
What do men and women each need to understand about investor psychology?
“In Japan, women typically handle the family finances. I’m starting to think that this is a good idea,” begins an article by Noah Smith in Bloomberg View.
He goes on to look at some of the ways that men take more investment risks than women, and the biology behind that. Aside from making riskier investments, he says, men also tend to trade more, which means more of their returns are lost to trading costs.
Read more: What Drives Men to Take Bigger Financial Risks?
Pam Krueger says that all of us, but especially women, need to reframe how we talk about investing.