While investors have more data at their disposal than ever before, making the right investment decision takes more than just crunching numbers. Investors must also understand the psychology of the market—as well as their own impulses—to help sharpen their rational decision-making process. This is especially during periods of market volatility, when emotions often get in the way.
“Behavioral finance” is a field of study that combines economics and psychology to help inventors identify and understand certain behaviors, often unconscious, that can lead to inopportune investment decisions. To understand how professional investors use behavioral-finance tools and frameworks to make smarter decisions, I recently spoke with Michael Mauboussin, head of research for Counterpoint Global, a growth-oriented global equity investment fund from Morgan Stanley Investment Management.
“Almost all behavioral-finance strategies have one thing in common: getting us to open our minds and think about things we wouldn’t have otherwise thought about,” Mauboussin said. “They’re not complicated, and they’re often key to reducing risk and avoiding mistakes.”