Behavioral Finance and Investor Types: Managing Behavior to Make Better Investment Decisions

Chapter 1

Why Reaching Financial Goals Is Difficult

I'd like to live as a poor man, with lots of money.

—Pablo Picasso

Why are so many people across the United States and other developed (and currently developing countries) in a position to accumulate wealth but have such a difficult time doing so? More often than not, the reason for this failure is that one's own financial choices and behaviors sabotage otherwise well-intentioned efforts to achieve stated financial goals—assuming one's goals are stated. For the purposes of this book, we will leave aside any discussion of the current outlook for the global economy, take no notice of the wealth distribution or wage levels, and stick primarily to the subject of personal financial management.

Intuitively, most people know that saving money is a good thing, but our desire for material goods and spending on services often overrides otherwise good instincts. Understanding why behavior is so difficult to control is actually quite simple—it is a lack of self-discipline driven by psychological and/or environmental factors—but the solutions are often complex and illusory. Later in the book, we will examine some of these complexities in detail and attempt to find solutions. In this chapter, however, we start by examining some simple examples of self-defeating behavior, two of which are nonfinancial and three of which are financial examples. By doing so, we gain a common understanding of the challenges involved in controlling behavior and ...