With a diverse background in finance, historic preservation, and community involvement, Blake Fortune, Partner and Chief Compliance Officer at Hamilton Capital Partners, brings a unique perspective to the field of behavioral decision-making in finance. In the following article, Blake Fortune discusses the interplay between human psychology and financial choices, shedding light on how cognitive biases, emotions, and social factors influence investment decisions and market outcomes. Most anyone at any time can make a financial investment big or small. But that’s only the beginning. For many investors, making the right investment depends on one’s mastery of behavioral finance. The more specific the short- or long-term financial goal, the greater the need for understanding essential behavioral finance concepts. M. Blake Fortune II of Atlanta says that this makes a difference. A poll of financial advisers found that 48% say there is a rise in retaining clients when behavioral finance is introduced. The same study found that integrating behavioral finance led to an increase in financial outcomes for clients and improved their financial decisions. A successful investor is a smart investor, and a smart investor understands behavioral finance.

Blake Fortune Discusses Behavior Finance Basics

Behavioral finance recognizes the influence psychology plays in dictating the financial behavior of both investors and financial industry employees. Blake Fortune reports that it explores the types of biases and influences that affect financial decisions and shape shifts in financial markets. Behavioral finance considers that investors may not always make decisions that are rational and may struggle with financial self-control. These financial mistakes are often the result of facing some form of adversity or financial uncertainty. A central tenet of behavioral finance is that by knowing this fact, investors are better equipped to make sound financial decisions and avoid errors. Though the concept is modern — it was pioneered in the 1970s — behavioral finance is seen as such a vital aspect of investing that there is a staff that focuses entirely on the subfield within the Securities and Exchange Commission.

The Role of Profit

Profit is a major guiding force within investing, but it can also lead to poor investments. M. Blake Fortune II of Atlanta says that within behavioral finance, investors are seen as more likely to take risks if they are facing a negative financial outcome but less likely to take risks if they face an outcome that is positive. The attractiveness of a quick profit is difficult to ignore for many, and it can lead to less risk-taking. It’s just one of the money mindsets that’s explored within the field. Many mindsets are formed based on experience, such as if one observed their parents making good financial practices or was directly impacted by irresponsible financial decisions.

Other Concepts

Financial decision-making is complex, but there are common concepts that shape investment choices, according to practitioners of behavioral finance, explains Blake Fortune. For example, herd behavior is a tendency to go along with a group’s financial decisions rather than letting one’s own knowledge dictate their financial actions. On one hand, it can lead to potentially devastating risks. On the other hand, with such momentum, investing can be an effective financial strategy. M. Blake Fortune II of Atlanta notes that other central financial behavior concepts include overconfidence bias or having an overly positive feeling about an investment that outweighs reality. Investors placing a large value on or only engaging in investments they have experience with is known as familiarity bias. Mental accounting refers to a tendency to separate finances into different accounts that are regarded differently when compared to one another. It can be a concern since it may cause an investor to ignore the overall state of one’s finances, but it is also positive since mental accounting can be used to pinpoint cash to reach important financial goals.

Making Better Decisions

Behavioral finance is explored as an academic and business concept, but it can have practical implications for a wide range of people and their financial goals. Blake Fortune says that by seeing how financial decisions can be guided by biases, emotions, and mental limitations, people are better informed about risk, personal debt, and investments overall. The goal is to maintain financial expectations that are rational leading to improved outcomes. The first step in eschewing biases and emotions in financial decisions is understanding how the brain is tricked to make irrational and irresponsible decisions. Irrational financial behavior may be common, but it’s behavior capable of being avoided. Financial professionals can use such concepts to help clients recognize their own impartial financial tendencies, leading them to make consistently better financial choices that in turn improve the economy at large. Blake Fortune explains that by understanding even, the basic concepts of behavioral finance, the average investor or financial manager can make positive, diverse, and therefore beneficial financial decisions that could impact their livelihoods.