BEHAVIOURAL FINANCE Behavioural finance is the study of both economics and psychology. Some issues that arise from behavioural finance include – Overconfidence – Investors take too much credit for their success. Brain surgeons don't perform operations after one week of training. New information can be over emphasised or under emphasised depending on a person's bias to that information. Random reinforcement, especially in a bull market. The need for instant gratification leads to impatience and impulsive behaviour. People accept risk when they have a loss and reject risk when they have a profit. To get the best results, one should do the opposite. People act differently (some would say irrationally) in crowds. The crowd overreacts to good and bad news. Which risk gets the most attention? The potential for a share market crash OR not having enough funds to retire. Over the long term, investing in the share market (either directly or via managed funds) gives excellent returns. However, these returns vary greatly from year to year, with negative returns likely every five or six years. After experiencing a year of poor returns, it is natural human behaviour to question whether the share market is too risky and so reduce exposure. Even though it seems counter-intuitive, this is usually the best time to buy. Conversely, by taking too little risk, one may not be able to build sufficient funds to enjoy retirement. Once one starts investing something very powerful happens – you become emotionally involved. Things like ones ego being on the line comes into play. How much investment knowledge do you have? How much time do you devote to management of your existing assets and potential new ones? Do you continue to build your investment skills? Studies in the USA have shown that most investors achieve worse returns than the funds that they invest in. This is because they buy into managed funds when the share market is booming (and receiving press coverage) and then sell out when the in-evitable periods of under-performance occur. The same thing happens to a larger degree for direct shares. How much is control worth? Is it more important than getting the best possible long-term returns? If my car is making funny noises, I don't try to fix it myself, but instead call a good mechanic. Methods to handle these issues include – Having a sound plan Patience to let the plan work and Discipline to stick to the plan.