Charlie Munger, the right hand man to Warren Buffett, shares his wisdom regarding human errors in judgment.
People are guilty of these errors every day and in all areas of their lives, including how they handle their money. the field of behavioral finance is a relatively new field that challenges traditional finance that was marked by Modern Portfolio Theory (MPT).
From this article in ThinkAdvisor:
A fully developed behavioral model of financial markets does not yet exist, but several underlying concepts and their resultant implications for investment management are emerging.
A Prospective Investment Framework
Financial markets are populated by human investors burdened with emotional baggage and associated cognitive errors. In a market context, these errors are amplified because, in the aggregate, they create herding, which leads to wild price swings. Rampaging emotional crowds cause extreme volatility of returns in financial markets. Look no further than equity market price bubbles for evidence of these rampaging emotions.
What are the differences between traditional finance and behavioral finance?
How can some of the common errors in human judgment impact an investor's decisions?
What can an investor do to overcome some of the biases he/she might face?
You must be a registered user to add a comment. If you've already registered, sign in. Otherwise, register and sign in.