Please reload

Recent Posts

Are you really a rational investor?

November 14, 2017

 Traditional finance theory depends on the concept of the Rational Economic Man
(REM), a perfect individual who knows how to make the best financial decisions
under uncertainty. However the typical investor can’t view himself in this way and
can’t rely on his initial decisions being fully rational for multiple reasons:

 

  • We don’t always have all the necessary information we need

  • Even if we had the necessary information how we interpret and process it may be flawed

  • We may have inner conflicts prioritizing short term with long term goals

 

When facing complex financial and investment decisions, we are often working
with limited information and our ability to make complex deductions is also
limited, in the face of this what we usually do is satisfice ( choose a satisfactory
choice rather than the best choice) and apply heuristics (simple efficient rules to
make a choice). As a result our investment choices can be sub-optimal and we may
miss out on important opportunities. But that’s only half of the problem, despite our mental limitations we also face more powerful emotional biases. Even if our intellect was prime At times, it is subservient to such human emotions as fear, love, hate, pleasure, and pain. 

 

Many times the 2 things making decisions for us are dopamine and serotonin.

This doesn’t mean you shouldn’t trust yourself when it comes to your investments
and always leave it to the professionals in every case. You can do a lot yourself
but you have to understand yourself.

 

You have to acknowledge the limitations and biases you face and understand how they are affecting your financial decisions. If you do so then you can start taking action to address them.

 

In the coming posts I will be looking at the main cognitive and emotional biases investors face and their consequences on their investment/portfolios, how to identify them and finally mitigate them helping you become a more rational investor.

 

Thanks and I hope you are excited to read my other posts!

Share on Facebook
Share on Twitter
Please reload

Follow Us
Please reload

Archive
  • Facebook Basic Square
  • Twitter Basic Square
  • Google+ Basic Square
  • Black Facebook Icon
  • Black Twitter Icon
  • Black Instagram Icon
  • Black YouTube Icon

Disclaimer: Any Advice or information on this website is general advice only. It does not take into account your personal circumstances, please do not trade or invest based solely on this information. By Viewing any material or using the information within this site you agree that this is general education material and you will not hold any person or entity responsible for loss or damages resulting from the content or general advice provided by PipsMatter, or anyone associated with PipsMatter.

 

High-Risk Warning: Online trading has large potential rewards, but also large potential risks. The high degree of leverage can work against you as well as for you. You must be aware of the risks of trading in forex, futures, commodities, cryptocurrencies, shares, and options and be willing to accept them in order to trade in these markets.

 

Forex trading involves substantial risk of loss and is not suitable for all investors. Please do not trade or invest with borrowed money or money you cannot afford to lose.

 

Any opinions, news, research, analysis, prices, or other information contained on this website is provided as general market commentary and does not constitute investment advice. We will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.

 

Please remember that the past performance of any trading system or methodology is not necessarily indicative of future results.

© 2016-2019 Pipsmatter.com