By Andrew Rosen via Iris.xyz
This year the Nobel Prize in economics went to Richard Thaler on his work in behavioral economics. He is the pioneer of the Nudge Theory, which helps explain why people make irrational decisions while also helping others exercise better self-control. His work influenced behavioral finance as well. For years now, we’ve been a huge proponent of behavioral finance. Heck, I’ve even written a white paper on its dangers and affects concerning financial planning.
On the coattails of behavioral economics being legitimized, I thought it would be a great opportunity to educate on how it transcends to our core value. It’s simply why working with a professional is essential for most of us to achieve financial success.
What is Behavioral Economics/Finance?
The definition of behavioral economics/finance is a mouthful! Basically, it takes behavioral and cognitive psychological theory and combines those with conventional economics and finance. The result provides an explanation for why people make irrational financial decisions. We are hardwired to make decisions on instinct. It’s part of the fight-or-flight mentality, our natural survival tactic.
Why is it so dangerous?
The issue arises when we take this fight-or-flight mentality and apply it to our personal finances. For instance, we have a few dismal days in the stock market and it causes you to suddenly change your entire investment philosophy.
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