Last summer, I lived in Scottsdale, Arizona. I temporarily moved out of San Francisco and was living my best vagabond life. While I was having a great time overall, I was constantly anxious. I couldn’t stop thinking about what to do next in my career, concerned over the state of the world and scared about the future. I even developed severe night sweats and would wake up frequently at 3 am feeling like I had woken up in a pool.
The 3rd week of living in AZ, my friend Eliza came to stay with me. Eliza was a yoga instructor, therapist (in training at the time), and all around energy guru. She immediately recognized there was something going on and asked if she could help. She said, “I want to start with an exercise. I’m gonna sage the sh*t out of this place.” She then proceeded to dance around the apartment, casting all the bad spirits and energy away. While I was skeptical, the whole ordeal was hilarious and the first time I felt a sense of relief in a while.
The next day, she had another idea. She said, “I want to read your Unicorn Cards.” I gave her a blank, cynical grimace and Alex laughed from across the room. Nonetheless, I decided to go for it. We went to her room, sat down on the floor and she placed 5 crystals on the ground.
“Before we get started, I want you to choose the crystal that resonates with you most.”
As I rolled my eyes, I picked up the rose quartz and she told me, “It has healing properties which are thought to support emotional and relationship healing.” Maybe there was some truth to this.
We then talked through the cards for the next hour and she gave me a reading. She shared insights about me, the anxieties I was feeling and aspects of my “unconscious” that I needed to confront. Essentially, she helped me look back and internally so I could move forward.
And that leads me to today’s topic, behavioral finance. Because sometimes when you need to move forward financially, you need to reflect on the past and where your money story came from.
WTF are you talking about?
Behavioral finance is the study of the effects of psychology on investors and financial markets. It focuses on explaining why investors often appear to lack self-control, act against their own best interest, and make decisions based on personal biases instead of facts.
What do Unicorn Cards and Behavioral Finance have in common?
They can seem Woo Woo - Unicorn cards, crystals, and all things mindfulness related can seem ridiculous. As someone that is generally quite rational, I couldn’t understand why saging my house or having my cards read was going to make me feel any better. In fact, I found it ridiculous. Behavioral finance can also seem outlandish as it is the study of understanding the emotional and behavioral side of decision making. However, the reality is, the best investors in the world aren’t necessarily the “smartest” but the ones that behave the most wisely.
They are backed by science – Okay, unicorn cards are not exactly backed by science (no matter how hard I tried to find a scholarly article). However, mindfulness is. Mindfulness practices increase the connections between the amygdala and prefrontal cortex. In other words, when you practice mindfulness, you can train yourself to be less reactive to stressors and to recover better from stress when you experience it. Behavioral Finance is also backed by science. Starting in the 1980s, psychologists Daniel Kahneman and Amos Tversky and economist Robert J. Shiller — started developing and testing their theories.
They are supernatural – Have you ever had someone read your cards and think, “How the heck did they know that?” While I am certainly still a bit of a skeptic, there were things Eliza said to me that day that I swear only I knew. Behavioral finance is similar. I used to think the best investors in the world were the ones that were the most educated, had the most experience and knew all the “tricks of the trade.” The truth is quite contrary. The real trick to being good at finance has a lot to do with behavioral rather than intelligence.
Example: For example, between 2000 and 2019, the average equities investor earned an average return of 4.25%. At the same time, the S&P 500 increased 6.06%. That means, the investors that were making “informed” decisions were actually worse off than the investors that trusted the process. If that’s not sorcery work, I don’t know what is.
They give you insights into your psyche - When getting my reading, Eliza gave me 5 gem stone options and I chose the rose quartz. She then explained how the stone emitted emotional support. As I said at the beginning, I was going through a deeply stressful time and feeling quite lost emotionally, so the symbolism behind the stone helped me come to terms with something I had been neglecting and struggling with. Behavioral finance allows you to come to terms with your own flaws and human limitations. For instance, when you dig into the study, you realize it's all about recognizing that humans are naturally irrational. Once you realize that, you can actually start to improve your behavior and make better decisions.
How does Behavioral Finance Work?
Behavioral Finance is complicated and I certainly won’t be able to cover all the subject matter in one article. That would be like saying, “let me teach you psychology in 500 words.” Nevertheless, I will do my best to introduce you to some of its most basic concepts. And before I start, I’d recommend thinking about the stock market like a person. No matter how intelligent they might seem, they have emotions, can be irrational, experience ups and downs, and most certainly are not perfect.
How Can I Think about Behavioral Finance?
Behavioral Finance is broken down into 4 main concepts.
Self Deception - This is the practice of allowing yourself to believe something that is not true. It impedes us from making rational decisions.
Example: “This stock is going to go up because my wealthy neighbor owns it, therefore it must be a good investment.”
Heuristic Simplification - This is the act of oversimplifying a situation in order to produce solutions.
Example: “I know Pelaton’s stock is going to go up because it’s the holidays and everyone is going to be buying Pelaton’s as gifts.”
Social Influence - This is the act of making decisions because of influenced by others.
Example: “Mark Cuban said this crypto currency is going to the moon, so it must be a good investment.”
Emotion - Emotion in behavioral finance refers to making decisions based on our current emotional state.
Example: “I feel really good about buying this house, I have a feeling it’s the one.”
Behavioral Finance also recognizes a number of Biases that humans have including:
Overconfidence - This is the act of having overconfidence in the quality of your information, and your ability to act on it at the right time for maximum gain.
Example: “I recently took a course on investing so I am going to start actively managing my portfolio.” Fact is, fact, 90% of passive managers outperform active managers. AKA, just because you think you’re good doesn’t mean you’re going to win.
How to overcome it:
Trade less and invest more over time.
Resist the urge to believe that your intuition is better than others in the market.
Confirmation Bias - This is the tendency for humans to interpret and retain information that matches their preconceived notions and beliefs.
Example: “I think X stock is going to go out of business.” And then you proceed to only read articles about the company going out of business rather than assessing all the facts.
How to overcome it:
Challenge yourself to get the complete picture rather than use stats and arguments that fit your preferred narrative.
Loss Aversion - Loss aversion is the tendency to prefer avoiding losses to acquiring equivalent gains
Example: “I’m going to keep my money in cash because I think the market is overvalued.”
How to overcome it:
Think long term and know the stats.
How Can I Learn About My Own Biases?
Take your Aura quiz to learn more about you and your money story! Think of it like therapy for your wallet – your therapist can’t help you with your problems without digging into why they are your problems in the first place.
What’s next?
Thank you for reading!! If there is a topic you want to discuss, please DM me on Instagram at @notyourbfsinvestmentadvice or email me at kelsey@aurafinance.io. I also recently Co-Founded a company called Aura - a financial wellness and investment platform. We are building for YOU. If you’re interested in joining the beta, sign up here.
See you next week lover!
Disclaimer:
All investment strategies and investments involve risk of loss. Nothing contained in this website should be construed as investment advice. Any reference to an investment's past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.
I make the best decisions (financially and otherwise) when my enviornment is clean. Your friend is on to something with the sage. Personally, I do a super deep cleaning about 1-2 a month and then burn a brand new candle to cleanse my space. All the windows are open naturally. Being in a clean space, resets my mind and motivates me to think more clearly.