Your Portfolio and Behavioural Finance

Portfolio Lesson 5.10: Recognising irrational behaviour is easy, but correcting it is another matter entirely

Morningstar 21 July, 2010 | 12:30PM

Finance professors aren't the first group of people you'd approach for investment advice. Academics seem to know more about how to study money than to make it. And so much academic advice seems to squeeze the fun out of investing. Countless academics advise not trying to actively choose stocks but to simply index the market. And countless investors reject that advice.

But if you end up in the same room with a couple of behavioural-finance economists, listen up. They study the psychology and behaviour of investors to see where they make mistakes. If you learn to spot and correct these mistakes, it may mean greater profits. And if you spend enough time with these people, you may even learn how to profit from the mistakes of other investors.

This lesson will explore what behavioural finance is and cover the common behaviour that gets in the way of achieving even better investment results.

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