January 9, 2017
Behavioral finance combines psychology and economics to explain how investors act. Instead of assuming that people (e.g., investors) always make rational financial decisions, behavioral finance proponents argue that behavioral biases strongly influence financial decisions. Unfortunately, behavioral biases can have a detrimental impact on investment results; thus, it is crucial for investors to be aware of, understand, and be able to identify the various behavioral biases that may impact their investment decisions. In this Navigator, we discuss some of the most common biases that can hamper an investor’s ability to make rational long-term investment decisions and provide several tools to help minimize the influence of behavioral biases in financial decision making.