Behavioral Finance/Economics is a new field, founded by Daniel Kahneman and Amos Tversky; Kahneman won the Nobel Prize for Econ in 2002; Richard Thaler, won Nobel Prize in 2017, for continuing their research.
Example of this study is auto-enrollment in 401k plans. Thaler found that one behavioral bias was to anchor to things how they were. So when participants are auto-enrolled in retirement plans at work, they tend to stay in the plan rather than opt out. It is estimated that this study has helped add over $30 billion to retirement accounts since 2011.
- Overconfidence has two components: overconfidence in the quality of your information, and your ability to act on said information at the right time for maximum gain. Studies show that overconfident traders trade more frequently and fail to appropriately diversify their portfolio.
- One study analyzed trades from 10,000 clients at a certain discount brokerage firm. The study wanted to ascertain if frequent trading led to higher returns. After backing out tax loss trades and others to meet liquidity needs, the study found that the purchased stocks underperformed the sold stocks by 5% over one year and 8.6% over two years. In other words, the more active the retail investor, the less money they make. This study was repeated numerous times in multiple markets and the results were always the same. The authors concluded that traders are, "basically paying fees to lose money."
- Anchoring bias occurs when people rely too much on pre-existing information or the first information they find when making decisions.
- So if a stock was at $100, then fell to $50, you perceive it as cheap when in reality.
- Basic expression is that you feel pain from losses more than you feel pleasure from gains.
- Being drawn to information that validates existing beliefs or opinions. This is often very common with political or religious beliefs, but also exists with financial topics as well.
- One example is believing the company you work for is the greatest company in the world. For example, if you have worked for Walmart in Arkansas for the last 30 years, you might hold a lot of Walmart stock because you’ve seen the company grow a substantial amount over that time period. But you might have missed out on the gains brought about by tech companies like Amazon who have innovated and taken market share from Walmart simply because you work for Walmart.
Meet Your Hosts
John Vandergriff is our Wealth Planning Team Lead. He has been a wealth planner for 9 years and on the air for 7 as your source for all things retirement. John covers everything from how current events could affect your savings, to strategies to maximize your retirement income, and everything in between. He now applies his knowledge and in-the-field experience to bring a unique perspective to the podcast.
Zach Hill is our Operations Team Lead and Portfolio Manager. Zach graduated from the University of Tennessee with a Bachelors degree in Finance and received his MBA with a concentration in finance from UT as well. His background with institutional investing and working with a fintech software startup makes him a perfect fit to lead our Operations team. Most of Zach's free time goes towards running Remedy, a local coffee shop, which he and a friend are co-owners of.
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