In an ideal world, emotions would play a very small role in the way people invest and manage their money. Everyone would thoroughly research their options, maintain realistic expectations, and keep counterproductive habits under control.
But in the real world, even well-informed investors sometimes make emotionally charged decisions that may threaten their ability to stay focused on important financial goals, such as accumulating enough money for retirement. In fact, such missteps are so common that many academics have done extensive research on “investor psychology” or “behavioral finance” to explain why some people tend to keep encountering the same obstacles in their financial lives.
As you might imagine, different financial attitudes can result in very different consequences. For example, the behavior known as “anchoring” is the tendency for investors to hold on to a belief based on their own limited experience, despite the availability of contradictory information.
For instance, someone who lived through the Great Depression might be more likely to be a conservative investor, while someone who did very well in the market during the 1990s might tend to be a more aggressive investor. Of course, history shows that type of decline or growth experienced by such individuals is more the exception than the norm. As such, one possible result of anchoring is making long-term investment decisions based on misguided performance expectations or incomplete facts.
Overconfidence in one’s own abilities is another mindset that could make it more difficult to achieve lasting financial security. Why? Because it may lead investors to ignore sound advice, misunderstand goals, and potentially implement inappropriate investment strategies. On the other hand, a lack of confidence may be to blame for the “fear of loss” (or “fear of regret”) that causes some nervous investors to adjust their portfolios too often — or not often enough.
You’ve Got Personality
It can also be insightful to think about what type of “financial personality” you have. “Impulsives,” for example, are prone to spending spontaneously and not saving enough. “Planners,” however, are in the habit of setting aside as much as possible and sticking to an appropriate investment strategy.
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