How Not To Fall Prey To Behavioral Weaknesses

Here are suggestions that will help you avoid investing mistakes that arise due to human weaknesses like greed, fear and laziness

- Sudipta Mitu

According to traditional economic theory, human beings are perfectly rational, and they make well-reasoned, logical decisions at all times. According to a new and rapidly developing field called behavioral finance, however, human beings are prone to greed, fear, and laziness due to which they often make decisions that are sub-optimal, and at times, outrightly irrational. How can we humans overcome our innate tendencies and avoid making such errors, especially in the field of personal finance? Here are a few suggestions that could prove useful.

Automate processes

One way to avoid making behavioral errors is to automate many of our personal finance-related actions. Every time we have to make a decision, we may procrastinate, saying that we do not have enough information to decide, or that we don’t have the time. By resorting to automation, we can ensure that things run smoothly without requiring any additional effort from us.

Saving: Suppose that you wish to save 25 percent of your salary every month. One way to do so is to have two savings bank accounts. Treat the one in which you receive your salary as your expense account and the other one as your investment account. If you receive your salary on a fixed date every month, give a standing account so that 25 percent of your in-hand salary account gets transferred right at the start of the month, to your investment account.

Investing: Next, start systematic investment plans (SIPs) in a few carefully chosen funds. Automating investments thus will ensure that you invest regularly (SIPs will also give you the benefit of rupee-cost averaging). On the other hand, if you decide to invest in an exchange-traded fund, which requires you to call your broker every month, it is possible that you may not be as regular in investing.