What Is Behavioral Finance

| May 26, 2018
Share |

I wanted to refresh my Investor Character Equation of Stimulus + Reaction = Outcome with some research from The Behavioral Edge by Fuller & Thaler.

Traditional finance and investing techniques are based on one key variable: that investors act in a rationale capacity – always.

The Efficient Market Theory is based on the following:

  • Accurate Forecasting
  • No Emotions
  • Unbiased Judgement

Theoretically, if the S&P 500 is +8.2%, the average investor will be +8.2% over the same time horizon.

Behavioral Finance is based on the theory that investors are indeed human and not robotic.

This realistic version is based on the following:

  • Use Imperfect Rules of Thumb
  • Have Emotions
  • Make Flawed Assumptions

Therefore, investors ARE biased. This leads to the Behavioral Gap.

DALBAR conducted a study over a 20-year time period ending in 2015 that showed this Behavioral Gap.

In actuality, the S&P 500 over this time period was +8.2%. HOWEVER, the average investor return was just 2.1%.

This is one of the reasons the following quote is on the front page of my client presentations:

“The most important investment ability is an emotional discipline.” ~William Bernstein


Stay Tuned, Disciplined & Patient! {TJM}

The Investor & Character Equation (ICE) | S + R =


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Meyer Capital Group), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Meyer Capital Group. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Meyer Capital Group is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Meyer Capital Group’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Share |