Behavioral finance is the study of human behavior in a financial context; it acknowledges that the human side is critical to investment success.
Mr. Scandariato shared five steps to begin investing from a behavioral finance perspective:
1. Define your attitude toward investing and assess your financial situation. There are various approaches to investing:
• Barbell approach: heavily weighted toward conservative investments with a small proportion in risky, opportunistic investments.
• Attachment approach: desire to hold on to all assets, with particular difficulty letting go of “losing” assets.
• Emotional approach: invest based on “gut;” a classic “buy high, sell low” investor. Mr. Scandariato says many people buy high and sell low for several reasons related to emotions, including overconfidence, recency — the feeling that what has happened recently is going to continue — gut reactions and herd behavior — the tendency to follow others’ investment strategies.
2. Articulate and prioritize your needs and goals. Goals should focus not just on the upside, but also on minimizing losses on the downside, according to Mr. Scandariato. “Position yourself so on the downside, when you have challenging times, you can weather that,” he said.
3. Create an investment plan to meet your objectives.
4. Devise a strategy and implement it.
5. Review progress, adjusting the strategy as appropriate.
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