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Importance of Behavioral Finance

Updated: Jan 17, 2021

You might be asking yourself why are we writing so many articles based around behavioral finance? If this is your first time encountering this topic, you may want to click back on previous posts. For starters, we've done a brief introduction, and the history.

So why should I care?

The biases and theories in behavioral finance may at first glance, appear to be irrelevant to actual investing. But it is the complete opposite; these aspects of the decision-making process have an extremely strong influence. Some irrational decisions that people make based on their emotions can very much directly help or hinder their success.

You should care because the purpose of behavioral finance is to help explain why people make certain financial decisions and how those decisions impact the Stock Market.

And most importantly, how the decisions that you make because of your emotions and biases impact your life long-term. In essence, behavioral finance allows investors to train themselves to avoid falling for traps, such as value traps, that could decrease their personal wealth. By being aware of their behavior, investors, and you, can potentially avoid the traps that prevent the choosing of optimal choices.

Am I Working Against Myself?

Possibly. But don't lose sleep over this.

As an investor, you are your biggest enemy. Your mind is constantly working against itself. A miscalculation that originated from your fears could force you to sell your assets at a low price and conversely, purchase them at the most expensive price. And if you've been reading us for quite a while, you should know this term.

Evil Kermit meme

How Can I Become a Successful Investor?

Education. To be a successful investor, you should educate yourself about how your decisions are actually made to understand why you make the choices that you do. Education and research are part of some risk mining basics that you should remember before investing.

Behavioral finance doesn’t tell us how to beat the market. It equips us with the psychology and the information that we need in order to beat the market. And this is the importance of financial literacy.

And this is exactly what we aim to do. ETFication seeks to provide you with the necessary information and the tools to become the shepherds of your own finances.

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