Take your foot off the throttle
Friday 29 February 2008
An interesting article by Matthew Vincent the FT on February 22. He introduces the concept of behavioral finance and the problem of over confidence. “Do you consider yourself an above-average driver? Do you feel more comfortable driving rather than flying? Do you judge your speed on the motorway by the other cars around you?
Calm down, dear – unlike that bumptious film director in the TV adverts, I’m not trying to sell you car insurance. But I am trying to sell you an investment strategy based on cognitive biases. Because if you answered yes to any of those three questions, you’re demonstrating the same behavioural mistakes that are driving the markets today – mistakes that fund managers believe can be exploited for profit."
It is the over-emphasis of recent news which makes investors ignore longer-term data that offers opportunities for fund managers. But is it? It sounds great to know when there is an over reaction, that someone with a cool mind, driving sensibly (using a driving analogy…and clearly not with ones foot on the throttle..well not too much anyway!), can take advantage of the situation. But if it was simple to do, all the fund managers would be doing it and actually generating returns for their investors that boosted their returns above average. You have guessed, they are not all doing it because it’s not easy to do.
Yet the world of behavioural finance does offer significant value to investors' understanding of how they invest and their expectations. We are all human, we read newspapers, watch TV, listen to colleagues, friends and family, all of which impacts on our judgement and how we see things. We are not computers making logical decisions….and being aware of its importance in the decision making process is vital to every investor.
Categories: Behavioural Finance, Analogies
posted by Murray Round Wealth Management @ 23:05,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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