The evolution of investor behaviour

24th September 2012

During previous buoyant markets, we were often happy to hand over capital to a fund manager or independent financial adviser (IFA) and leave them to their own devices, but when the economic tide goes out this tack must change.

Over the last ten years the world has changed fundamentally and strategies and experts that we've been used to may not be providing us with the same returns.

Meanwhile, the market backdrop remains confused.

Is this the new normal?

Who knows, but there is certainly a lot of noise in the system, and the mixed signals over the pace of economic recovery is seeing markets struggling under the pressure and unsure where to turn.

As Mindful Money reported in ‘Survival of the Fittest' we are experiencing natural Darwinism at its most acute, with only the fittest companies surviving the ongoing slaughter.

While this will undoubtedly affect investment decisions and financial plans going forward, how investors adapt their behaviour to embrace these changes will ultimately affect investments returns.

Market behaviour is continually adapting under evolutionary pressure (Psyfi blog)

Of course, an understanding of the fundamentals of investor behaviour is key to how we might adapt.

Here, we can turn to behavioural finance. This provides us with an insight into the impact of social and psychological factors on traditional economic theory and decisions. It is not a new field of economics but one which commands more attention in an environment often driven more by emotion than logic.

Yet our behavioural biases are really taking the punches these days. We have to consider the rocky global economic outlook, alongside changing times for the adviser industry, and the fact that our experience has taught us, well, that even the experts don't have a crystal ball when it comes to market movements.

The composition of the brain and how it impacts investment decisions is the product of constant evolution over millions of years. In its current form it originated in the Stone Age with the need to hunt and the need to live in a manageable clan. But based on the needs of that time its fundamental structure can hardly be ideal for the complex modern investment age.

While every investor carries their history of development around with them, which was helpful out in the wild and on the hunt, this is not always beneficial in modern society.

So where can we turn?

Many of us face anxiety, fear, and even panic – these are all feelings that come from dealing with an unknown investment climate.

If we were always rational, we would make the best decisions and optimise financial investments free of emotions, and be what economic textbooks term a Homo œconomicus.

But we're not, and we need help in ever complex times – so enter the current climate and the network-directed investor. This is the growing band of savers and stock buyers who find their own third way via the collective wisdom of online networks.

"The Network-Directed investor sees the web as their social support system, avoiding the mainstream media with their marketing messages and choosing to gain fragments of information from the blogosphere and online discussion" says Stewart Conway, publisher of Mindful Money.

These days, investors combine logical thinking with behavioural patterns from the Stone Age that enabled their ancestors at that time to survive, alongside a networked approach with the abundance of opinion available to us online and beyond.

The final words can be left to Psyfi blog: "…the best way of learning in investment markets is from other peoples' research and experience. You'll never learn enough from your own to really make a difference."

And that's the modern age

An advanced investor – using their intuition, honing their skills, seeking advice from the mass of networks available, and shutting out the noise of economic crisis


More on Mindful Money

I group-think, therefore I am

Survival of the fittest

The changing face of the FTSE 100 – and passive investing

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