16 June 2023
Neha Sahni
Director, Global Market Strategist, HSBC Global Private Banking and Wealth
Behavioural finance is a field of study that focuses on psychological factors driving investors’ decisions in the financial markets. By blending finance and psychology, behavioural finance tries to identify biases that lead investors to make irrational investment decisions and demonstrates how difficult it can be to get rid of these human follies even when they are told that their choices aren’t optimal. Several behavioural finance studies show that financial markets can be influenced by investor sentiment, which may sometimes be too optimistic or pessimistic, and deviate from underlying fundamentals.
FOMO Fear of Missing out is often: |
JOMO Joy of Missing out is when: |
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FOMO Fear of Missing out is often: |
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| JOMO Joy of Missing out is when: |
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FOMO Fear of Missing out is often: |
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| JOMO Joy of Missing out is when: |
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FOMO Fear of Missing out is often: |
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| JOMO Joy of Missing out is when: |
| Key behavioral bias | How to address these biases |
| Anchoring and adjustment bias | 1. Don’t try to address all the biases at once. Figure out which top two or three biases impact your investment decisions the most and try to continuously keep those biases/behaviours in check. 2. The best way to avoid behavioural biases is to take emotions out of one’s investment decisions by having an investment “pre-commitment” in place . A rule-based strategies like Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) are known to statistically deliver positive outcomes over the long term. Removing discretion from day-to-day decision making around trading and investing reduces the chance of trading on impulse or be driven by fear and greed. 3. Stick to their investment process/strategy over the long run. Doing so should protect investors from their conscious and unconscious behavourial biases and deliver the best possible investment outcomes. |
| Overconfidence bias | |
| Investor myopia | |
| Herd behavior | |
| Disposition effect | |
| Status-quo bias |
| Key behavioral bias | Anchoring and adjustment bias | Anchoring and adjustment bias |
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| How to address these biases |
1. Don’t try to address all the biases at once. Figure out which top two or three biases impact your investment decisions the most and try to continuously keep those biases/behaviours in check. 2. The best way to avoid behavioural biases is to take emotions out of one’s investment decisions by having an investment “pre-commitment” in place . A rule-based strategies like Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) are known to statistically deliver positive outcomes over the long term. Removing discretion from day-to-day decision making around trading and investing reduces the chance of trading on impulse or be driven by fear and greed. 3. Stick to their investment process/strategy over the long run. Doing so should protect investors from their conscious and unconscious behavourial biases and deliver the best possible investment outcomes. |
1. Don’t try to address all the biases at once. Figure out which top two or three biases impact your investment decisions the most and try to continuously keep those biases/behaviours in check. 2. The best way to avoid behavioural biases is to take emotions out of one’s investment decisions by having an investment “pre-commitment” in place . A rule-based strategies like Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) are known to statistically deliver positive outcomes over the long term. Removing discretion from day-to-day decision making around trading and investing reduces the chance of trading on impulse or be driven by fear and greed. 3. Stick to their investment process/strategy over the long run. Doing so should protect investors from their conscious and unconscious behavourial biases and deliver the best possible investment outcomes. |
| Key behavioral bias | Overconfidence bias | Overconfidence bias |
| How to address these biases | ||
| Key behavioral bias | Investor myopia | Investor myopia |
| How to address these biases | ||
| Key behavioral bias | Herd behavior | Herd behavior |
| How to address these biases | ||
| Key behavioral bias | Disposition effect | Disposition effect |
| How to address these biases | ||
| Key behavioral bias | Status-quo bias | Status-quo bias |
| How to address these biases |
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