“Investing isn’t about beating others at their game. It’s about controlling yourself at your game” – Jason Zweig

The above quote means a lot when we see our life from a magnified view. Let it be any financial decisions we take, at some point in time we do have comparisons, status, and other external factors affecting it. Due to these comparisons, an investor at times misses to take the right investment decisions at a given period of time.

This is a behavior pattern that I have observed in many investors when they opt to plan their financial journey. The reason behind writing this blog is to help investors understand irrational investment decisions. So to avoid making an irrational investment decision, it is imperative that investors know the importance of behavioral finance as a subject when we deal with our personal finance. So let’s start knowing behavioural finance in layman’s language.

What is Behavioural Finance?

Behavioral finance is the study of the effects of psychology that affects the behavior of investors and the financial market as a whole. Basically, it throws light on a number of reasons like lack of self-control, not taking decisions in your own interest, and other personal biases neglecting the facts.

Behavioural finance uses psychology and economics to understand the reasons behind the wrong financial decisions that were taken out of emotional pressure rather than logic.

For better understanding, I would want to share a personal experience here –

It is said that external factor plays a major role that makes your behavioural change. I love trekking and on weekends I keep going on different treks. This time we were heading to the Valley of Flowers to experience some scenic beauty. Well, this was the thing worth visiting when we asked a few of the other trekkers who have been there already. With sheer excitement to see some beautiful landscape, we all reached there. We saw the flowers and it turned out low on expectations. First, there weren’t as many flowers as described, and according to us were also not as beautiful as we imagined them to be. Here I want to bring attention to the point that every individual has a different view about the same thing.

The same goes with finances as well. What we think is crazy financial decisions for us must be ideal for some other person. Few investors say that FDs are good or rather they must have been born in the time frame when FDs were the only option available. But that doesn’t mean they work for all the new investors. Today there are multiple choices of investment avenues available in the financial markets. If someone says that a particular investment has worked or has not worked for them, we need to ask 3 questions –

• Why have they invested in a particular product?
• What is their time horizon?
•  How they have linked this product to their personal financial goals?

The meaning of personal finance differs from individual to individual. Because there must be different goals, aspirations, and other pre-conditioned situations they must be having or going through. You need to understand your goals, time horizon, and risk appetite and then invest accordingly. Obviously, there might be many other noises in the market like equity is risky, or FDs are not earning enough, etc. All you need to hear is one voice which is your goals and financial plans.

Let me share my thoughts on investment decisions that clients took before they were associated with us.

Children Education

I feel this topic makes parents so emotional that they forget to plan their retirement and in the end, they end up being dependent on their children. Here they need to know that with a child’s education it is important to plan their own retirement because no one wants to be dependent when their age is to experience financial freedom. Also, the most important thing many forget is that children can get loans for their higher studies which can be repaid from their earnings, but to get a loan for retirement is something that is not doable.

Buying a house

The desire to buy a house makes sense when you are buying for consumption purpose or investment purpose. But it is not advisable to buy a house with any kind of financial pressure over and above individual affordability. A house is an illiquid asset. You can’t sell only the bedroom or bathroom if you are in an emergency, Right? Hence with respect to emotions, it is important to check while buying a house that we don’t disturb our current cash flows as that in turn can cause more emotional disturbances.

Buying a car

Buying a car in metro cities like Mumbai can be termed an emotional decision. Because we are in an era where we can book a cab within a couple of minutes. Whereas when you buy a car, you need to pay the maintenance, you need to find proper parking and moreover, if you are not an avid driver, the expenses of a driver and your time getting wasted can be avoided. You need to also take the cost of fuel into consideration. A well-planned provision for all the above things without disturbing your current cash flow might be a rational decision.

To sum up this thought, I would like to say that, we are brought up in surroundings where we have seen our elders and parents taking financial decisions emotionally thus being irrational 80% of the time. If another person has done this we also need to do this and that’s where the base problem arises. We need to be logical to make personal finance work in our favor. Rest Ego, Pride, and Comparisons are ready to kill you off.