Behavioural Biases in Investing
06 August 2016
It is interesting to watch perfectly logical, highly educated individuals throw rationality out the window and act in a seemingly insane manner. This obviously happens over money.
That is why asset bubbles have occurred and will continue occurring time and time again. Whether it is a bubble in dotcom stocks, telecoms, gold or property, it will happen, as individuals tend to exhibit what is called “herd behaviour”.
Much like the buffalo which roam the plains, there is a high tendency for individuals to mimic the actions (rational or otherwise) of a larger group. Psychologists put it down to social conformity. However, economic historian Charles Kindleberger in his book “Manias, Panics and Crashes” put it succinctly:
“There is nothing so disturbing to one’s well-being and judgement as to see a friend get rich.”
In another study done by Harvard Medical School and detailed in Jason Zweig’s book “Your Money & Your Brain”, getting rich through such means stimulates the same area of the brain as scoring a hit off an addictive drug. No wonder so many people get sucked in!
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