Hard to believe, but it’s been twenty years since Austin Powers (the International Man of Mystery) first admonished his groovy love interests with the catchy, “Oh, behave!” which, of course meant, “Yeah, baby, please continue!”
The mod super spy’s feigned rebuke aside, when it comes to money, “behaving” is the key driver of investor performance, YOUR performance, (not to be confused with investment performance).
The study of investor behavior, behavioral finance, examines the psychology of financial decision-making. It provides a window to understanding how our personal biases–our deep-rooted psychological hardwiring–drives our decision making process and impacts our bottom line performance.
Markets are efficient because all investors have timely access to the same information, since stock prices reflect the knowledge and expectations of all investors. Behavioral finance tells us that not all investors are efficient, or effective, because not all investors behave rationally or in the same way to the very same news, due to an infinite range of personal biases.
You’re so emotional
Market performance is driven by largely unpredictable events, but investors are driven largely by their personal biases, good or bad. By getting in touch with our own all-too-predictable emotional behavior we set ourselves up to make better, less emotional decisions which can lead to better, more consistent returns.
But can you get out of your own way? Absolutely, by spend less time reacting to hot tips and more time doing a deep dive for some honest self-examination of your own bias-driven reactions and behaviors. What are your internal signals and switches?
From his book, The Secret Language of Money, author, coach, and CEO of MentorPath, an executive coaching practice, David Krueger, M.D, asserts that each of us has a unique money story. “On the surface,” he writes, “money is something quite simple…a carefully manufactured piece of paper or shiny coin,” yet in spite of all the information and effort expended to know and understand money (the thing), we continue to struggle with money (the emotion).
So, we spend when we should save, we buy when we should sell. Why is it so tough to get it right?
The answer has little to do with money, the thing. Instead, it has everything to do with money, the emotion, and what we tell ourselves about money, our personal money story, according to Krueger.
What is Money?
Money is power and vulnerability, freedom and bondage, a measure of our intelligence, a one-way ticket to love and respect, the root of all evil, the sum of our self-worth; the existential yardstick, and that dirty little piece of paper in our pocket. Money is all that! And more.
When our biases rule, we mishandle money, our emotions driving us to a fate of making uninformed, ill-timed and illogical decisions.
Markets are confusing. They may inexplicably soar, then take a header in the very same day, or hour! Traditional Wall Street cause-and-effect assumptions have been changing for some time, so you need to know the things you can control as the tickers roll up and down in the endless fear-greed cycle.
You have a money story. It holds the key to busting through the roadblocks to your financial success. Know your biases, study your behaviors. Know which ones put you ahead and which ones kick you to the curb.
Until you do this, keep that dirty little piece of paper in your pocket.