These things are, of course, important. However, what can sometimes fly under the radar is the significant role of investors’ own behaviour in determining their investment success.
Two investors with different behavioural profiles who invest in the same company or fund can sometimes achieve very different returns. This can happen if they respond differently to new information and, as a result, choose different times to invest, reinvest, or sell their investments.
For example, consider two investors who are broadly invested in the stock market at a time when the market experiences a significant decline. In response, both are likely to feel a degree of fear and anxiety. This is expected.
In addition, both might recognise the fact that despite the decline, in the long-term markets are likely to recover. In these circumstances, the ‘rational’ and ‘emotional’ drivers of their decision-making are in conflict.
For one investor, their psychological profile and investment habits might lead the rational arguments to have the stronger influence on their decision. They decide not to sell. For the other, the powerful emotional drivers might hold sway. They sell and avoid buying back in for many years.
We've seen it happen
In fact, this scenario accurately describes two very different ways people actually did respond to the Global Financial Crisis of 2007-2009. Those who held through this turbulent period, rather than selling in the midst of the gloom, have seen dramatic increases in the value of their portfolios as a result of a largely consistent bull market since the low point of the GFC in 2009, whereas those who have stayed in cash have missed all of these gains.
The conclusion from these types of examples is not that buying and holding is always the best strategy, simply that in many cases investors can profit from better understanding and managing their own behaviour.
Human behaviour is complex. But complex behaviour does not mean that it is entirely intractable, unpredictable, or unmanageable. Research into human decision making by neurologists, psychologists, and behavioural finance specialists has revealed three common themes:
- Human behaviour is often ‘context-dependent’. Our decisions can be heavily influenced by the circumstances in which we make our decisions, often in ways and to extents that surprise us.
- Human behaviour is often quite personal. While researchers can identify general trends that apply to investors on average, we should also expect substantial differences between different investors.
- Human behaviour is often influenced by things that operate beyond our conscious awareness. While most of our brain functions are subconscious, controlled laboratory studies, brain scans, and the analysis of real-world data can help to reveal these processes and to allow investors to better manage them.
The basis for our behavioural finance quizzes
The OpenInvest Know Thyself quizzes are based on this research. Because they are tailored, the Know Thyself quizzes are intended to allow investors to answer this question: What specific behavioural strategies can help me improve my investment outcomes given my specific circumstances?
As you complete the Know Thyself quizzes you will be provided with guidance and feedback on behavioural issues and strategies based on your personal circumstances, such as:
- Your age and gender;
- Your past experiences, skills, and training;
- Your preferences and attitudes;
- Your risk tolerances, loss aversion, and confidence;
- Your investing habits;
- The sources of investment information you use, and how that information is framed;
- Your personality profile (including your conscientiousness and your openness to new ideas and to feedback);
- Your social context (such as whether you work with a co-investor, and how well you work with your co-investor);
- The types of feedback you receive about your investments;
- Your physical and mental wellbeing;
- Your expectations about the future; and
- Your choices about what to do yourself (versus what you prefer to rely on others to do for you).
You’ll also have the opportunity to compare your responses with those from both other individual investors and professional investors.
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About the author:
Simon Russell is the founder and Director of Behavioural Finance Australia, where he provides specialist training and consulting. He holds qualifications in psychology and finance and is the author of two books and numerous articles on behavioural finance.
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