COVER STORY

The human psyche appears ill-suited to the world of investing . While at its most simple , the ethos of investing can be distilled into “ buy low , sell high ”, it appears to be one of the few pursuits where we feel uncomfortable buying something that has suddenly become much cheaper , shunning it instead for something we could have picked up for half the price just a couple of months earlier . You do not need to look too far to see examples of this behaviour . Data from the Investment Association shows that in 2021 , when the global stock market hit its peak , retail fund sales reached their second highest year on record . A year later , as tumbling markets made starting valuations cheaper , retail funds saw record outflows . This is an example of what is called “ herd behaviour ”, when humans mimic the actions of their peers . The trend of outflows is also likely to be shaped by “ the emotional gap ”, which refers to decision-making based on extreme emotions such as fear or excitement , rather than fundamentals . Both concepts fall under the banner of behavioural finance , the idea that psychological influences and biases cause investors to make irrational decisions , creating anomalies in the stock market .

Under the carpet Alice Guy , personal finance editor at interactive investor , says behavioural finance and our individual psychologies are perhaps the most under-discussed variable in investment circles , yet our subconsciouses , biases , family backgrounds and world views all play a vital role in how we manage money . Daniel Pereira , investment manager at Square Mile , agrees with her . “ Aviation enthusiasts will know that the leading cause of aeroplane crashes is attributed to human error ,” he says . “ It ’ s not that different in the world of investment where human emotions can often get in the way of one ’ s better judgement .

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