Are we always rational when it comes to investing in an asset or a security? Nothing is less certain. In any case, this is what behavioural finance says when it looks at the crucial influence of psychological factors on our financial decisions. Far from being insignificant, factors such as emotions, cognitive biases and herd behaviour play a major role in this area. The work of this discipline offers more detailed understanding of the behaviour of individuals, investors and markets.

Cognitive biases and prospect theory
Behavioural finance is based on two main pillars: cognitive biases and prospect theory, the latter having been formulated by Daniel Kahneman and Amos Tversky. The study of cognitive biases highlights the imperfections of human thinking when it comes to financial decision-making. Biases such as confirmation, overconfidence and loss aversion can distort the supposed rationality of economic choices, sometimes leading to incorrect asset valuations or impulsive decisions. Prospect theory explores the way in which individuals evaluate gains and losses. It reveals an asymmetry in valuation, with losses having a greater emotional impact than equivalent gains. This perception influences risk-taking and can lead to unpredictable financial behaviour.

Financial education obviously plays an important role in mitigating the risks arising from cognitive biases. By helping individuals to recognise their own tendencies, we equip them to make more informed financial decisions. The result is performance in line with their expectations.

Behavioural finance offers new insights into the forces behind financial choices. By recognising the impact of emotions and cognitive biases, investors contribute to the stability of markets and the health of the economy.

Understanding these factors is essential for asset managers, who must guide their clients through the pitfalls of behaviour. They are therefore trained to analyse the markets objectively, eliminating any emotional distortions that might interfere with decision-making. By identifying their clients’ potential cognitive biases, managers can also reduce errors of judgement. Hence the importance of establishing transparent and proactive communication with them. Professional asset managers must also clearly explain investment strategies, associated risks and potential market movements to their clients. A thorough understanding of investment choices reduces the risk of knee-jerk reactions to fluctuations.

As investment professionals, asset managers have a responsibility to guide their clients. By adopting an analytical approach, actively managing emotions and designing diversified portfolios, they play an essential role in preserving wealth and achieving long-term financial goals. And this is all the more important when the financial world is marked by uncertainty.