The study of behavioural finance tells us one thing: that investing involves a decision-heavy process riddled emotion, that the outcome is uncertain, and most importantly, that we are absolutely not hardwired to do it well.
So, where does this information leave clients, and their advisors, who are looking to grow and manage their wealth through investing?
In a CFA seminar held in Toronto yesterday, entitled “How Biology Impacts Investment Decisions”, Michael S. Falk, a partnering consultant for Focus Consulting, tackled the topic of how investors and their planners can both understand and battle our biology, in order to come out on top and be successful at investing.
Falk explained that we “satifice” our investments—in his view, we sacrifice higher returns for gains that merely satisfy our lowest expectations, stopping at what is “good enough.”
Individuals tend to attain only “imperfect optimization,” since we are all compromised by the constraints and biases caused involuntarily by our biology every day.