What is Behavioural Finance and why does it matter?

In the course of my work as a financial adviser, I have become more and more aware over the years that my job is as much about counselling and coaching as it is about knowing the financial stuff. I have watched people make bad financial decisions, against my advice of course, and seen people rewarded for making good decisions. In recent years I’ve become aware of the term behavioural finance and come to understand a little about it. But what is behavioural finance, and why does it matter to you?

What is Behavioural Finance?

There are many definitions of what behavioural finance is, but one of the best I came across is fromInvestopedia:

“Behavioral finance is a relatively new field that seeks to combine behavioural and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.”

In other words – and I’m at the risk of over-simplifying a very complex and nuanced subject here – behavioural finance is the study of how investors get in their own way, and hamstring their financial progress by making bad decisions.

If we can understand why we do certain things, and become aware of them as a result, we can be prepared and hopefully side-step some of them when they arise.

Resources mentioned in this week’s show

Here’s the worksheet I mentioned to give you some questions to ask, and write down the answers to help you self-evaluate your attitudes to money.

 

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Question: What is your biggest ever money mistake? What is the best financial decision you ever made?

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