The Rational Investor

By: Chrisloy Robinson, Senior Portofolio Advisor Posted:

Much of the traditional financial theories are based on the assumption that investors act rationally and consider all available information in the decision-making process. This approach has proven to be ineffective.In assessing the behavioral biases and errors an individual may exhibit when making financial decisions, we observed the following:

  • Herding
    The herding mentality bias refers to the tendency of investors to follow what others are doing. This is largely influenced by emotions rather than by their own independent analysis.
  • Anchoring
    Anchoring refers to when investors rely too much on pre-existing information or make investment decisions primarily based on the first information they receive.
  • Confirmation Bias
    This refers to the tendency of investors to pay close attention to the information that confirms their beliefs about market fluctuation and ignore the information that contradicts it.These biases explain why people tend to buy stocks after a long rally and sell them after a long or sharp market decline. Put in more general terms, when it comes to making investment decisions, it is important to separate the irrational from rational behavior.It is also important to note that when it comes to investing, anyone can fall prey to bias and emotional trading.Identifying and assessing these behaviors can help investors develop a greater understanding of how they make decisions and convey the importance of removing emotions from their investment decisions. The goal is to make them aware of simple psychological shortcomings. This will prevent them from taking actions that are not coherent with a smart investment strategy or reduce the likelihood of swift judgments every time there is a market fluctuation.Another great way to combat these kinds of decisions is to rely on someone, such as a Portfolio Advisor, who can look at market activities and interpret them with clarity. They can help you filter your decisions and guide you to make rational choices.

    This first step is to outline your financial goals to ensure that all investments are aligned with said goals rather than hunches. This will also assist in creating a solid roadmap for future investments.

    Avoid bias and emotional trading by contacting your PROVEN Wealth Portfolio Advisor to help you develop a sound investment strategy to achieve your goals.