Behavioral Finance Concepts
Sometimes, knowing what to look out for helps us understand and identify situations with family and ourselves.
Mental Accounting is where a person treats one dollar differently than another. Let’s say you inherit stock from a deceased parent, who worked for "Insert Big Name Here”. With a stepped up cost basis, that individual should at least evaluate whether or not that company’s stock is consistent with their investment objectives or exposes them to single stock risk (if it’s a large part of their new net worth). Mental Accounting may make that person very reluctant to do anything with that, “blocking it out” from their overall plan.
Anchoring is sticking to certain beliefs, even if new information should alter such beliefs. We don’t see many people saying the world is flat, but it’s likely we all do some level of anchoring in our lives.
Rationalization is where someone needs a “yes man”, searching for and relying on information that supports their decisions, all the while ignoring information that might challenge their beliefs. There are many results to be found in a Google search, and if you search hard enough, you’ll probably find the answer you want. -But is that the answer you need? Is it the right answer?
Overconfidence is achieved by overestimating one’s abilities, taking credit only for good decisions, and blaming others/ outside circumstances for poor decisions.