As humans, we tend to like order. We like lists, we like symmetry, we like calm. So when volatility in the stock market brings chaos to that order, we react. There is a term for this reaction—behavioral finance—and about 40 years of research behind it.
International Foundation board member and LifeSpan Services President Rick Garnitz has devoted much of his career to studying behavioral finance, and he describes it as the behavioral component to decision making. According to Rick, the simplest way to understand behavioral finance is to look at how we make decisions regarding investments. People are 2½ times more loss averse than they are gain positive. What does this mean? We are 2½ times more fearful of our loss than we are happy with our gain.
Let’s apply this to the stock market and other financial decisions, especially long-range planning. Once a loss occurs, we are afraid. (Will I be able to send my child to college now? How will this affect my plan for retirement?) As a result of our behavior more than doubling in intensity and loss adversity, rash and uncalculated decisions are made—Money is hastily taken out of a stock or quickly moved around. One way to combat this loss aversion is through the power of education.
Because of the chaos in our complex economy, it’s important to understand how finance works. The International Foundation has many tools for plan participants and plan sponsors to help prevent loss aversion that leads to poor decision making and high stress.
- Industry thought leader Robert Boston, CFA, presented on behavioral finance at the Foundation’s Annual Canadian Employee Benefits Conference in 2014. View a quick overview of his session, The Psychological Traps of Investing.
- The Foundation recently unveiled a Financial Education/Retirement Security site that’s filled with news, research, success stories, best practices and an interactive section titled Retirement 101.
- Both the U.S. and Canadian International Foundation Annual Conferences coming up in November will feature sessions that dig into important financial education topics.
- The Foundation has published a couple of articles on behavioral finance:
- Recent Foundation survey findings are available about workplace financial education:
Through education on the roller coaster that is today’s economy, poor financial decision making can be prevented, leading to a more prepared and lower stress you.
Communications Associate at the International Foundation