The Psychology of Investing

The importance of the psychological (or emotional) aspect of investing cannot be underestimated or ignored. Whilst some might be quick to dismiss investor psychology as waffle, it is so paramount to being a successful investor that a new field of scientific research has emerged of late, known as behavioural finance. This field of study examines human cognitive processes such as decision-making and investigates how various emotional and behavioural biases are engaged by humans in the field of investing.

The basis of much human error in the field of investing derives from the human tendency to employ and rely upon what are known as heuristics, or rules of thumb. Heuristics are essentially shortcuts that humans use without even being aware that we are doing so. We apply such rules of thumb as it is instinctive within us to do so. These instincts are hard wired into the brains of humans.

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