Joanita Male
As part of my studies recently, I came across a chapter on behavioural finance, and I found myself smiling.
It’s one of the more enjoyable chapters I’ve come across. Not because it explains markets, but because it explains us.
The textbook gives wonderfully technical names to behaviours most of us have been guilty of at one point or another. So, allow me to translate a few of my favourites into everyday language.
Loss aversion
Lose UGX 50,000 and it can ruin your afternoon. Find UGX 50,000 in an old handbag and you think, “Well, that’s nice.” Behavioural finance calls this loss aversion. We tend to feel the pain of losing money much more intensely than the pleasure of gaining the same amount.
Confirmation bias
You ask six people for advice. Five tell you not to do it. One agrees with the decision you’ve already made. Somehow, they’re the most sensible person in the room. That’s confirmation bias. We naturally give more weight to information that supports what we already wanted to believe.
Mental accounting
Imagine spending years working towards your first UGX 10,000,000. Now imagine someone unexpectedly gifts you UGX 10,000,000. It’s the same amount of money. Yet many of us would be far more willing to take risks with the money we received than with the money we earned. Behavioural finance calls this mental accounting. We assign different values to money depending on where it came from, even though one shilling is still one shilling.
Overconfidence
One of your investments doubles in value. Suddenly, you’re convinced you’ve got a gift for picking winners. The family WhatsApp group is about to receive some very confident investment advice. That’s overconfidence. We tend to overestimate our knowledge and our ability to predict what will happen next, often mistaking a good outcome for skill rather than luck.
Anchoring
You see a plot of land for UGX 50 million.
“That’s far too expensive,” you think. Not because you’ve researched today’s market. But because you still remember when similar plots were selling for UGX 10 million. That’s anchoring. We tend to cling to the first piece of information we receive and use it as our reference point, even when circumstances have changed.
Some chapters teach you about money.
This one taught me a little about myself
Img: WU Executive
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