Arnerich Massena is pleased to announce the publication of a new white paper: Behavioral Economics: Understanding your unconscious to become a better investor. The white paper examines the findings of behavioral economists, looking at the mental shortcuts and emotional influences behind some of our most inexplicable decision-making, and discussing strategies for improving decision-making logic and processes.

Traditional economic theories hinge on modeling a hypothetical individual who is perfectly rational and self-interested, but it turns out human beings are messier, with often-flawed reasoning and illogical decision-making. Over the last few decades, behavioral economists have been studying the mental shortcuts — or heuristics — humans use, and the ways emotions can warp our thinking to better understand how to anticipate where people fall short of rational judgment and what we can do to overcome our “bounded rationality,” a term coined by economist and psychologist Herbert A. Simon. Arnerich Massena’s paper outlines some of the most common heuristics — from availability and anchoring to status quo bias and the sunk cost fallacy — discussing how they operate and affect investors.

“Volatility can be an emotional experience for investors, particularly younger investors who grew up during a time of a historic bull market,” explains Co-CEO and Chief Investment Officer Bryan Shipley, CFA, CAIA. “For some investors, it helps to give context to their experience and solutions for making rational and logical decisions in the face of discomfort. Volatility is an innate aspect of investing (watch our recent videocast, Volatility: The Price of Admission to Long-term Returns, here), and actually contributes to long-term returns; our goal with this paper is to help investors manage that experience without letting it run their portfolio.”

Senior Investment Advisor and co-contributor Dave Janec, FRM, adds, “Ultimately, we want our clients to become better investors. An understanding of behavioral economics is important for anyone making financial decisions, but particularly for those working to build a long-term investment portfolio.”

The paper closes with ideas for maintaining discipline in an investment strategy, offering readers practical actions that can guide their investment decisions using rational facts, data, and analysis. Click here or below to read the paper.