“There is this interesting saying about what happens when a person with money meets another person with experience. The person with experience leaves with the money and the person with money is left with the experience!”

 

I believe that ordinary people can dramatically alter their life and lifestyle by understanding and re-orienting the manner in which they deal with money. It is like developing a skill. It takes time and perseverance to master it. Anyone who has ever tried playing golf would know what I mean. The first time around you try swinging at the ball on the greens, you hit everything apart from that ball lying complacently there. The ball knows you are not going to be hitting it for some time, just as the money out there knows that it takes more than an average investor to harness its true value. The good news is that skills can be learnt. Money management is not a very different skill. By altering your behavior towards money, you can actually change the entire equation that you have with the latter.

 

Let’s face it – most of us here are out to put more money in our pockets (or in our banks) through means that are hopefully above board. And most of you perhaps don’t think too differently. My message to all of you is – you can change your behavior in ways that will eventually result in putting additional money in your pockets. How do you do that? By understanding the psychological reasons behind majority of the financial decisions you take, day in and out.

 

What are we talking about here? If this sounds like too much of hocus-pocus, let me say that this is perhaps one of the most researched and perhaps the least practiced disciplines in the history of the financial world. Underpinning this is a field of research that has been doing the rounds in academic circles for the better part of the past three decades or more. This area of research is popularly referred to as “Behavioral Finance”. Some academicians do refer to this as “Behavioral Economics”, but during the course of this article and the following articles on Behavioral Finance, we will refer to it as Behavioral Finance.

 

Simply stated, Behavioral finance is the study of how psychology affects finance or financial decisions. It combines the two areas of psychology and finance to explain why and how people make irrational and illogical decisions when they are dealing with money. Psychology is the backdrop for the playing out of human desires, behavior and motivations; it is also the basis for a vast array of human errors that stem from money illusion, overconfidence and over-reliance on heuristics. Errors and biases cut across the length and breadth of the financial landscape, be it the institutional investors, analysts, strategists, portfolio managers, brokers or individual investors like you and me.

 

While this series of articles is meant for the majority of categories mentioned above, the individual investor will benefit most from identifying their own inherent heuristics and psychological biases that are keeping them from achieving the kind of financial success they may want to achieve.. Since the key purpose of this series of articles on Behavioral Finance is to highlight the psychological aspects of our financial behavior, I have consciously refrained from introducing research material on how the markets moved at such and such time, or how the stock markets performed over say, the last ten years, and so on. That does not mean however that the latter is any less important from the perspective of behavioral finance – but that is possibly more relevant for institutional investors, portfolio managers, options traders, currency traders, futures traders etc. Which is why it will form the subject matter of my next book on Behavioral finance (The first one was tiled – “Think! Your way to millions” and was one of the first works on this subject in India).

 

These articles are going to be especially relevant in today’s time when the country is experiencing the stock market bouncing back to close to the 20,000 figure. What has changed to make the market to become so “highly priced”? Is the market truly highly priced? Are strong fundamental factors keeping the market high, or is the market this high only because of some wishful thinking on the part of investors that blinds them to the true situation (also called irrational exuberance by Robert Shiller and Alan Greenspan).

 

The stock market is not the only place where irrational behavior gets exhibited. It happens everywhere where a financial decision is being made – the real estate market, shopping malls and in every other little decision that we take related to money. Still, most of us are singularly unaware of the reasons behind our behavior and therefore are at a loss to understand how to address the same.

 

As you go through the next few articles on this subject, you will realize that people are millionaires not because they are born so or because they are more intelligent than the rest of us – they are rich (a millionaire is just a representative symbol) because they have a very different attitude and behavior towards money, and in how they make financial decisions.

 

By the time you are through with the next few articles on Behavioral Finance, we would have hopefully demystified some common questions like:

 

 

The answers to the above questions (and more) are easily found in an understanding of Behavioral finance, which these articles will help you understand. As I mentioned at the beginning of this article, how successful you are in applying the learning’s from here will depend largely on how diligently you practice the truths shared herein. If nothing else, after following these articles, you will be better aware of how to improve your finances. Thereon, your success would depend on how strongly you want to alter your behavior towards your financial decisions.