How understanding behavioural finance can add value
Recent examples of irrationality in markets and individuals highlight signs for investors to look out for and opportunities for financial services professionals to coach their clients
by Tim Cooper
Scientific understanding of investor psychology is growing, helping skilled advisers save hundreds of thousands for clients over their lifetime. Nobel prize-winning academics such as Richard Thaler and Daniel Kahneman have shown that deeply-embedded behavioural biases – such as overconfidence, greed and fear – drive most investment choices.
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These errors cost the average uncoached investor between 1% and 4% a year in returns, depending on which study you read. Over 20 to 40 years, this could have a devastating impact on investment goals.
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