Investing is a logical endeavor and human beings with our highly evolved
prefrontal cortex are very well suited to making great financial decisions
Right? Ah, no it's not how it is at all in reality when it comes to financial
decisions we're actually wired to do it all wrong
in this video I talk about behavioral finance and three investing mistakes
that are so easy to make but that you need to avoid coming up.
Hey I'm Dr. Brad Klontz on this channel we help you transform your relationship with money
master the psychology of wealth and live a life of abundance so if you're new
here please subscribe and click the bell see you don't miss anything so what is
behavioral finance behavioral finance is the application of cognitive psychology
to finance which looks at how we are hard-wired to think and solve problems
studies have repeatedly shown that the human brain which was designed for
survival in a world of large predators and competition for food is quite
impaired when it comes to making good rational financial decisions for this
reason we've seen market bubbles and crashes throughout all of recorded
history from the tulip mania which swept Holland in the 1600s to the tech bubble
to the housing bubble of 2008 we just keep doing the same crazy stuff when it
comes to money so I'm gonna break down three investing mistakes you are going
to make unless you stop following your gut and you start second-guessing
yourself warning if you have a fragile ego best to just hop off this video
right now because I'm about to serve you up with some harsh truths stuff your
friends are too afraid to tell you it's about to get kind of nasty. Mistake
number one: overconfidence bias. So let's get real you think way too highly of
yourself sorry someone had to tell you you have way too much faith in your
intuition your judgment and your cognitive prowess this makes you prone
to taking too much risk and you're embarrassingly sure of your conclusions
so guess who's better at investing men or women
cancer women studies show that they're better on average by about 1% why
because they aren't as cocky and men end up trading more often which pummels
their returns so a good dose of self-doubt will really help you become a
better investor and not quite as annoying. Mistake number two: a narrow
frame of reference. So did you start investing around 2009 yeah you've done
pretty well of course you have a monkey throwing darts could have picked a
winning portfolio in the past decade a decade that saw the biggest stock market
bull run we've seen in history so calm down genius investing is for the long
haul so whether you're getting hyped up about your recent success or you're
terrified about a big drop making emotional decisions based on a narrow
frame of reference is pure poison for your portfolio so get some perspective
Mistake number three: anchoring bias. Oh man this is a tough one we are way too
influenced by the price we bought something for the price of a stock the
price of a house whatever we get stuck to it it's like a mental anchor the
problem is is that mental anchor can drag us down to the bottom of the ocean
when it comes to markets whatever number we have in our head is meaningless it
actually has nothing to do with the actual market value of that thing so how
can this hurt us it leads to anchoring statements of pure destruction when it
goes back up to where it should be that's when I'll sell I have seen people
ride a bad investment maybe you have all the way down to zero being weighed down
by this mental anchor don't let this happen to you your investment is worth
exactly what the market says it's worth no more no less so don't make any
decisions based on your fantasy number in your head there so are you alright
are you okay I didn't mean to hurt your feelings but it's so important for you
to not trust your instincts around money we're all hardwired to do it all wrong
so when you face a financial decision make sure to take a step back seek some
outside advice and not give in to your impulses special thanks to the
Heider College of Business at Creighton
University for helping sponsor this channel if you like this video and you
want to see more like it please subscribe and make sure to check out the
video description below for and resources I'll see you next time