Behavioral Finance has its roots in the economical psychology research of XX century. In the result of D. Kahneman and A. Tverski work and formation of the Perspectives Theory in 1979 the Behavioral Finance area received new impulse for development and application in practice. The 2017 Nobel Prize in Economics was awarded to R. Thaler for the research in Behavioral Economics area.
Our Methodology is based on the most recent research in the Behavioral Finance and Investor Psychology area.
Let us have a look at Alex, 39, from London.
Alex has a family and the second child is coming quite soon. It seems that it is time to consider moving into a bigger house (market price today ~$300,000).
Being one of best specialists in his area, Alex is also planning to start his own practice in a few years from now.
The investment to start the own business would require another $150,000.
Alex is willing to invest his savings of $300,000 in order to get $450,000 in a few years and reach both of his investment goals (new house and own practice).
If any of the investment goals are not reached, Alex will be disappointed by the investment process and the experience overall.
So what's the difference?
Classic finance theory would see Alex as aggressive high-risk investor willing to reach high returns - and will suggest investing into stocks.
Behavioral Finance determines Alex as over confident and nor prepared for the losses investor with two specific and independent from each other investment goals.
Taking into account Alex's knowledge about financial markets and behavioral biases, Behavioral Finance allows to:
- more carefully assess the investment profile of Alex, focusing on his investment objectives and
- prepare the most suitable investment solutions (in case of Alex - providing the asset split and less risky overall).