19 Jun 2023
Neha Sahni
Director, Global Market Strategist, HSBC Global Private Banking and Wealth
Behavioural finance is a field of study that focuses on psychological factors driving investors’ decisions in the financial markets. By blending finance and psychology, behavioural finance tries to identify biases that lead investors to make irrational investment decisions and demonstrates how difficult it can be to get rid of these human follies even when they are told that their choices aren’t optimal. Several behavioural finance studies show that financial markets can be influenced by investor sentiment, which may sometimes be too optimistic or pessimistic, and deviate from underlying fundamentals.
FOMO Fear of Missing out is often: |
JOMO Joy of Missing out is when |
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FOMO Fear of Missing out is often: |
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| JOMO Joy of Missing out is when |
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| Key behavioural bias | How to address these biases |
Anchoring and adjustment bias |
1. Don’t try to address all biases at once. Identify the top two or three biases that impact your investment decisions the most and try to continuously keep those biases or behaviours in check.
2. Adopt a rules-based strategy that combines core holdings (also known as “Strategic Asset Allocation”) and thematic investments (often referred as “Tactical Asset Allocation” or “satellites”) in a well-diversified portfolio, along with periodic portfolio reviews. This strategy statistically delivers positive outcomes over the long term.
3. Remove discretion from day-to-day decision making around trading and investment, and stick to your investment strategy over the long term. This should protect you from your conscious and unconscious behavioural biases and stop you making impulsive decisions |
| Overconfidence bias | |
| Investor myopia | |
| Herd behaviour | |
| Disposition effect | |
| Status-quo bias |
| Key behavioural bias |
Anchoring and adjustment bias |
Anchoring and adjustment bias |
|---|---|---|
| How to address these biases |
1. Don’t try to address all biases at once. Identify the top two or three biases that impact your investment decisions the most and try to continuously keep those biases or behaviours in check.
2. Adopt a rules-based strategy that combines core holdings (also known as “Strategic Asset Allocation”) and thematic investments (often referred as “Tactical Asset Allocation” or “satellites”) in a well-diversified portfolio, along with periodic portfolio reviews. This strategy statistically delivers positive outcomes over the long term.
3. Remove discretion from day-to-day decision making around trading and investment, and stick to your investment strategy over the long term. This should protect you from your conscious and unconscious behavioural biases and stop you making impulsive decisions |
1. Don’t try to address all biases at once. Identify the top two or three biases that impact your investment decisions the most and try to continuously keep those biases or behaviours in check.
2. Adopt a rules-based strategy that combines core holdings (also known as “Strategic Asset Allocation”) and thematic investments (often referred as “Tactical Asset Allocation” or “satellites”) in a well-diversified portfolio, along with periodic portfolio reviews. This strategy statistically delivers positive outcomes over the long term.
3. Remove discretion from day-to-day decision making around trading and investment, and stick to your investment strategy over the long term. This should protect you from your conscious and unconscious behavioural biases and stop you making impulsive decisions |
| Key behavioural bias | Overconfidence bias | Overconfidence bias |
| How to address these biases |
||
| Key behavioural bias | Investor myopia | Investor myopia |
| How to address these biases |
||
| Key behavioural bias | Herd behaviour | Herd behaviour |
| How to address these biases |
||
| Key behavioural bias | Disposition effect | Disposition effect |
| How to address these biases |
||
| Key behavioural bias | Status-quo bias | Status-quo bias |
| How to address these biases |
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