Behavioral Investing Definition

By: Bill Waters
Published: Aug 11, 2021

Behavioral Investing Definition - The definition of behavioral investing is a relatively recent revolution in finance that applies insights from all of the social sciences.

New decision-making models incorporate psychology and sociology, among other disciplines, to explain economic and financial phenomenon, such as erratic stock price variations.

In direct relationship with the signaling principle, the behavioral principle suggests that actions convey valuable information. Knowing when and how to use this principle can mean big returns. Learn how investors use the behavioral principle when making investments.

The behavioral principle is directly related to the Signaling Principle but whereas signaling conveys information, the behavioral principle makes use of the information. Information isn’t inherently useful to an investor unless it can be applied to a specific situation in which it is valuable.

Knowing what your boss ate for dinner last night is not useful unless you are inviting him over to dinner tonight and you want to make certain you don’t serve something he recently ate. The key is applying the information when the situation calls for it.

A new investor is especially vulnerable to bad decisions simply because of a lack of experience in deciding which securities are most in line with return expectations. One solution is to look at what other investors with more experience are doing. Especially useful is to look at investors with similar situations.

For example, young investors have the luxury of time and often invest in riskier securities early in their lives as they can afford to absorb some early mistakes older investors can’t afford to make.

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