Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias, + Website

CHAPTER 3

Situational Finance

It will, obviously, take quite a lot of therapy for us to come to terms with our egos' requirements to believe that we're a better than average investor. But with time we'll no doubt manage it, at which point we will be set to start reaping our investment rewards, no?

Well, probably not. It depends on the situation we find ourselves in because it turns out we that different situations cause us to behave differently. In normal life this is done so naturally that we don't even notice, and if we do we put it down to our internal decision making processes rather than the influence of our environment.

However, it turns out that the way we invest is heavily influenced not just by our own beliefs but by the situation we find ourselves in. Time for the tour bus to visit the highly irrational land of situational finance.

DISPOSITION VS. SITUATION

In Western societies we're brought up to think of ourselves as ruggedly individualistic, ploughing our personal furrows through life. In many ways this is typified by the idea of the American dream, the idea that anyone can achieve anything if they just try hard enough. As it happens, the United States has one of the lowest rate of social mobility in the Western world:¹ if you're born poor or rich you're likely to die that way, another example of how we prefer attractive stories to hard statistics.

It's also the central thesis behind the advertising industry: we live in a world bathed in advertisements, attempting ...