Behaviorial Economics

I came across an article on Vanguard’s Advisors Website this morning, which discussed Richard Thaler’s new book Misbehaving.

In this article two behavioral biases to watch out for – loss aversion and overconfidence – are noted.

Loss aversion obviously refers to the fear of economic losses. For many / most people the emotional impact of a loss is twice as great as the emotional impact of an equivalent gain. As a result the fear of an investment loss can be so strong that even appropriate levels of risk are avoided.

Overconfidence comes in to play with potentially too much trading and possibly not enough diversity in your holdings.

I’ve not read this book, but I have read enough about behavioral finance to be interested in understanding more about how it works.

Right now we maybe seeing some of that with the Chinese economy and the market’s reaction to their chalenges.