Professor Dan Gilbert

On Behavioral Finance




How Behavioral Finance Can Help



Behavioral Finance Venn Diagram

Behavioral finance combines psychology and finance. It reveals how people make financial decisions. It also provides behavioral solutions to help people make better choices. Let’s see how behavioral finance solutions 
can improve retirement outcomes...

You Vs Brain

Behavioral Challenges

By identifying problems that create behavioral challenges,
we are able to turn those challenges into solutions.

Group Think

Humans are the most social animal. We are more likely to follow the crowd than to think for ourselves.

In investing, it doesn't always make sense to follow the crowd.


 
 

Following the Herd

Following the herd might help in certain circumstances,
but it usually has the opposite affect when you invest…

Watch The Video Below
To See How Social Pressures
Instinctively Make People Conform



Poor Market Timing

shaky record of investor's market timing



Emotional Roller Coaster

emotional roller coaster

Present Bias

Humans have a 'Present Bias' -- evolutionarily speaking, our anecestors experienced a lot of day-to-day dangers, and this caused humans to evolve into being present-focused individuals.

How do we overcome 10,000+ years of human instict?


 
 

Present Bias

Humans have a 'Present Bias' -- we highly value our present self,
while we tend to ignore our Future Self.

Do you view your future self as a stranger?


 
 


Present Bias & Self-Control

Self control isn't a problem in the future...

In surveys, when asked which they'd prefer in 7 days,
75% of respondents chose the banana.

Behavioral Finance Venn Diagram

But it is a problem now...

When asked which they wanted today, the numbers switched!
75% chose chocolate, and only 25% chose the banana.


  present bias - behavioral finance
 
 

What does this show?
People want to be healthy in the future,
but they’re unwilling to sacrifice today.



 
 

Solution:
Make a smart decision about your future today,
and put things on auto-pilot.






Overcoming Inertia

overcoming inertia - behavioral finance

Solution:
Make investing the default choice, not the opt-in choice.





Loss Aversion

loss aversion
 

Solution: Time To Up It!



Can you time the Market?

  • In a 1975 study, Nobel Laureate William Sharpe determined that investors had to be right on market calls 70% of the time to beat a buy-and-hold strategy.

    Follow-up studies put the required winning percentage even higher.
  • If a person remained invested in the S&P 500 Index for the 20 years ending 2013, their annualized return was 9.22%. Missing the five best performance days (during 5,037 trading days) caused returns to fall to 7.00%

    The costs of being wrong are significant because long-term returns are often driven by just a handful of substantial days in the market
  • Missing the 10 best days created just a 5.5% return.

  • Finally, missing the top 30 (just 0.6% of total trading days) would have garnered a meager 0.9%!

Can you Outsmart the Market?





can you outsmart the market?