There are two ways of making better financial decisions.
One, getting information, analysis and education to make the right decisions. You do this by reading, searching, asking questions and advice. You can get them on the internet(blog, websites) and the media (print, TV) and your financial advisor.
Two, getting the right mental framework for our decisions. You do this by understanding your risk profile, being aware of your financial health and your aspirations. You need to be aware of your fears as well as greed. You can get them by creating an environment where you are able to reach your goals.
It takes both the above components to succeed. One, is easier than the Two. To my mind, the second component is more critical to your success. For example, just doing a PhD in Financial Markets wouldn’t make you a successful investor. You also need to overcome your fears and greed to make balanced, rational decisions as against emotional decisions.
Here’s some excerpts from a study done by CFEB
The ground-breaking work of the psychologist and Nobel Laureate Daniel Kahneman and his colleague Amos Tversky demonstrated that the classic economic laws of rationality do not lie at the heart of human decision making.
Our behaviour is not guided by a kind of super-computer that can analyse the cost and benefits of every action and determine maximum wellbeing. Instead, it is led by our adaptable, sociable, emotional, instinctive brain which uses mental heuristics − ‘rules of thumb’ − to deal with the myriad choices we face.
Generally these serve us very well, but they can sometimes lead to misperceptions and misjudgements. So the mental shortcuts that enable us to cope with a complex world can sometimes get us into trouble, both as individuals and collectively.
Two processes operate in the brain. One is reflective (controlled, effortful, deductive, slow and self-aware), and the other is automatic (uncontrolled, effortless, emotional, fast and unconscious).
In real life, the distinction is not so clear-cut: a dynamic mix of both reflective and automatic processes generally governs our behaviour. When driving a car, for example, we can focus on the radio and apparently drive on autopilot. Our reflective system is ignoring everything but the radio, but our automatic system is not because if we hear the sound of a horn we break off from listening to the radio and focus all our attention to the situation on the road.
Two general models for population-wide behaviour change have emerged in recent years:
• interventions that aim to change behaviour by providing information,
education and tangible incentives; and
• interventions that change behaviour by changing the environment within which the person acts.
Information is easy. But creating environmnet for success is not an easy, armchair exercise. You need to continuously expose & challenge your existing environment to make way for an enabling NEW environmnet.
Do you have some ideas on what the new environment should look like? Do share. Or wait for another post!
Btw, thanks for reading and encouraging me to resume blogging. Awaiting your thoughts.
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Hi Ranjan,
The stress on reflective and automated processes was apt. Nowadays we are inundated with information. But there is a limit to our ability to process the same. Hence there is no one-to-one correlation between information and investing success. Many newbie investors are frustrated by this loose (and not firm) linkage.
We also deal with behavioral predicaments and the virtue of adopting a common sense approach to investing, in our blogposts (www.ppfas.com/blog). Please read it in your spare time. Would look forward to your comments too.
Hi Ranjan,
Our blog URL is http://www.ppfas.net/blog.
Sorry for mentioning the wrong URL last time….
Warm Regards,
Jayant Pai
We also deal with behavioral predicaments and the virtue of adopting a common sense approach to investing, in our blogposts (www.ppfas.com/blog). Please read it in your spare time. Would look forward to your comments too.