According to the Corporate Finance Institute, Behavioral Finance Theory is based on the premise that individual investors commit errors of knowledge, make emotional decisions, and are influenced by social pressure. They also claim that Traditional Finance Theory is based on rational markets and investors, that neither are confused by errors of knowledge, and investors have perfect self-control. We believe the technical term for both theories is Hooey.
Regarding the distribution of knowledge, of course it is not even, and the acquisition of knowledge depends on the motivation of each individual. More importantly, it is not irrational to act on principles rooted in the best knowledge one possesses. However, it is irrational to evade new and relevant information, or act on principles one knows to be flawed. Problems arise when the emotions of the subconscious mind are programmed by irrational ideas; the ones that randomly accumulate in someone’s conscious mind.
The efficacy of any philosophy depends on its starting point. At Affluent Capital, our advisors begin with each investor living the one life they have with confidence. That also happens to be one of America’s self-evident truths – the natural right to pursue happiness. Productive work follows and can offer the happiness that is affected by the attainment of material values, not irrational whims. Gratification is the effect of productiveness, and rational principles for thought and action are the cause. Yet, none of this is easy.
The elation experienced by ice hockey coach Herb Brooks after his college kids won the gold medal at the 1980 Olympics is impossible to imagine. He had challenged himself with a seemingly impossible task, and to succeed, it seemed he adopted the mindset of an entrepreneur – create the vision, take calculated risks, avoid mistakes, and measure success. We know his vision, the calculated risk was a game strategy dominated by offense, avoiding mistakes meant player selection, and success required their 100% commitment to this new team, not the tribalism of college rivalries.
For clients of Affluent Capital, emotional rewards are defined by the facts and values of each investor, and then reduced to terms that can be measured – dollars of future wealth. To be objective, the investment strategy decision must be integrated with the enjoyment to be earned through productive work and rational investing.
After the pursuit of happiness is the principle that wealth is produced by man’s capacity to think. Next is Say’s Law – production creates its own demand; money - the essential tool for voluntary trade; and markets - the efficient allocation resources. All of this requires the economic freedom of property rights and the moral recognition of profits, not the tribalism of social justice investing.
At Affluent Capital, the challenge is for investors to think like an entrepreneur. Their vision is the spiritual rewards attached to the gain of material values. Calculated risk means that investors will increase risk exposure when it helps satisfy their ambitions. In our opinion, the mistakes to avoid include listening to behavioral finance experts. Investors should not be reduced to instinctual animals. Lives of motion and purpose are possible, and real.
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The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. There is no guarantee that any strategies discussed will result in a positive outcome. All investing involves risk and no investment strategy can guarantee a profit or protect against loss, including the potential loss of principal.