{"id":6108,"date":"2021-09-03T10:00:27","date_gmt":"2021-09-03T10:00:27","guid":{"rendered":"https:\/\/www.francescopaese.it\/behavioral-finance-why-you-should-use-it-when-investing\/"},"modified":"2025-10-07T16:19:02","modified_gmt":"2025-10-07T16:19:02","slug":"behavioral-finance-why-you-should-use-it-when-investing","status":"publish","type":"post","link":"https:\/\/www.francescopaese.it\/en\/behavioral-finance-why-you-should-use-it-when-investing\/","title":{"rendered":"Behavioral Finance: Why You Should Use It When Investing"},"content":{"rendered":"

Behavioral Finance to Address Market Uncertainty: Don’t Get Distracted by the Sirens<\/strong><\/h2>\n

In light of the current economic-health crisis that we have been experiencing for over a year, the
question many investors are asking is how situations of uncertainty <\/strong>in the markets may not
necessarily represent a negative factor, but could even offer an opportunity <\/strong>for their savings.
Clearly, this is not easy to navigate, and this is where behavioral finance<\/strong> comes into play. <\/p>\n

Looking at the Past Is Not Enough<\/strong><\/h2>\n

The simplest thing to do in these cases is to look at past performances <\/strong>during times of crisis.
However, two aspects must be taken into consideration: <\/p>\n

    \n
  1. Every crisis has a unique origin, development, and explosion<\/strong>, and they always
    manifest in different ways. Moreover, crises are sometimes the result <\/strong>of irrational
    behaviors by investors, making us all accomplices and victims, from the famous 1637
    “<\/strong>Dutch Tulip” <\/strong>Mania to more recent ones, such as the 2006 subprime <\/strong>mortgage crisis,
    the 2015 Chinese stock market<\/strong> crash, and even the current one.<\/strong> <\/li>\n
  2. We experience market events based on our personal history<\/strong>, our knowledge of the
    surrounding events, and the influence of the opinion leaders<\/strong> we have chosen as
    reliable sources for our preferences.<\/strong><\/li>\n<\/ol>\n

    At this point, it becomes clear how complex it is for an individual investor to decipher<\/strong> which
    events represent a threat and which are an opportunity for their portfolio. In moments of doubt, it
    is, conversely, much easier to be swayed by irrationality.<\/p>\n

    The Remedy for Irrationality Is Behavioral Finance<\/strong><\/h2>\n

    Behavioral finance has become a well-known field among financial professionals, and its recent
    literature has effectively highlighted how investors<\/strong>‘ behaviors<\/strong> often do not find rational
    justification, and consequently, lack consistency <\/strong>with the investment decision-making<\/strong>
    process. This happens because, when faced with unexpected events, we tend to make
    decisions in an approximate manner, relying on so-called “heuristic biases<\/strong>“\u2014mental
    shortcuts our brains use to estimate unknown probabilities and make decisions in
    ever-changing external contexts<\/strong>.<\/strong><\/strong> <\/p>\n

    In this regard, the French economist Maurice Allais <\/strong>developed his famous paradox, questioning
    the theory of expected utility<\/strong> and demonstrating how individuals <\/strong>behave <\/strong>ambiguously <\/strong>when
    choosing between almost certain and probable events.<\/p>\n

    For instance, we might make decisions <\/strong>based on a limited set of information<\/strong>, fall prey to
    representativeness heuristic<\/strong>, change our mind depending on how data is framed (the
    so-called “framing effect<\/strong>“). Furthermore, an investor who, in theory, would benefit from seeking
    higher expected returns in exchange for increased risk, might instead be influenced by recent
    market trends and his short-term experiences<\/strong> due to loss<\/strong> aversion<\/strong>.<\/p>\n

    Avoid Being Tempted by the Sirens<\/strong><\/h2>\n

    I often discuss these aspects of behavioral finance<\/strong> with my clients, as I believe that emotional
    factors are just as important as the technical aspects of the markets.
    \nMoreover, I believe that financial education<\/strong> must be a continuous process to help raise awareness <\/strong>of investment
    choices. This is the real opportunity to leverage during times like the one we are experiencing.
    \nRather than simply discussing how every crisis in the long run has been overcome through the
    ability to maintain positions and “keep a steady nerve,” it is crucial for investors <\/strong>to internalize
    the need for proper planning<\/strong>, based on expected utility or concrete life goals<\/strong>.<\/p>\n

    Everything else is navigation <\/strong>toward a goal<\/strong>, subject to unpredictable changes in external
    conditions that should not make us lose our way<\/strong>. Using a metaphor, I would say that along
    the journey<\/strong>, there will be false myths and temptations <\/strong>that seem irresistibly attractive, such as
    the idea that one can get rich through trading or Forex, or that one should sell before every
    political election (or referendum) and then buy back, or that the Euro is nearing its end… New
    “temptations” will always arise!<\/p>\n

    In a sense:<\/p>\n

    The investor should act like Odysseus, who, in his emblematic “self-commitment,” limits himself
    in the face of the sirens, knowing that resisting their call rationally is impossible.<\/em><\/p>\n

    In conclusion<\/strong>, whether a situation presents an opportunity or a threat during a crisis depends
    on the investor\u2019s ability to see the financial advisor not only as a professional manager<\/strong>
    capable of identifying investment solutions <\/strong>aligned with the risk\/time relationship\u2014something
    a robo-advisor could handle\u2014but more importantly, as an emotional manager<\/strong> who
    understands <\/strong>the needs <\/strong>or fears related to the fate and destination of one\u2019s money.<\/strong>
    Because behind every opportunity or threat lies a range of emotions that vary from client to
    client.<\/strong><\/p>\n

    The investor should begin to ask themselves:<\/p>\n

      \n
    • How many times has my advisor providentially contacted me to consolidate my gains?<\/li>\n
    • How many times has he been a positive obstacle in preventing me from capitalizing on
      losses?<\/li>\n
    • Without my advisor, would I have saved the same amount?<\/li>\n
    • Am I aware of my risk profile and my time horizon?<\/li>\n<\/ul>\n

      Can I help you answer these questions? Contact me. <\/p>\n<\/div><\/div><\/div><\/div><\/div>\n","protected":false},"excerpt":{"rendered":"","protected":false},"author":1,"featured_media":6105,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[32],"tags":[],"class_list":["post-6108","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-advice"],"yoast_head":"\nBehavioral Finance: Why You Should Use It When Investing - Francesco Paese<\/title>\n<meta name=\"description\" content=\"Behavioral finance comes into play when in uncertain times like this the markets represent a threat and\/or an opportunity for investments\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.francescopaese.it\/en\/behavioral-finance-why-you-should-use-it-when-investing\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Behavioral Finance: Why You Should Use It When Investing - 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