This chapter digresses from classical theory to take a look at how both personal and market behavior can deviate from the classic risk-return relationships and the consequences for personal financial planning and thinking.
- 13.1: Investor Behavior
- Rational thinking can lead to irrational decisions in a misperceived or misunderstood context. In addition, biases can cause people to emphasize or discount information or can lead to too strong an attachment to an idea or an inability to recognize an opportunity. The context in which you see a decision, the mental frame you give it (i.e., the kind of decision you determine it to be) can also inhibit your otherwise objective view.
- 13.2: Market Behavior
- Your economic behaviors affect economic markets. Market results reflect the collective yet independent decisions of millions of individuals. There have been years, even decades, when some markets have not produced expected or “rational” prices because of the collective behavior of their participants. In inefficient markets, prices may go way above or below actual value.
- 13.3: Extreme Market Behavior
- Economic forces and financial behavior can converge to create extreme markets or financial crises, such as booms, bubbles, panics, crashes, or meltdowns. These atypical events actually happen fairly frequently. Between 1618 and 1998, there were thirty-eight financial crises globally, or one every ten years.
- 13.4: Behavioral Finance and Investment Strategies
- You can apply your knowledge of findings from the field of behavioral finance in a number of ways.