How often do you hear the news about investors losing a few million dollars in their investments and sued the bank because “I did not know what I have bought”.
Why would some people who are smart enough to make a million dollars from their work or business in the first place made such bad decisions?
This is often due to what is called “information overload” in behavioral finance. Here is why…
In 2004, Julie Agnew and Lisa Szykman published a paper in the Journal of Behavioral Finance, revealed that people with a low level of financial knowledge suffer particularly from information overload.
Many are simply overwhelmed and cannot cope at all. This leads them to take the path of least resistance, the “default option” in investment planning.
While some investors inevitably have too little information, others have too much, which leads to panic and either bad decisions or trusting the wrong people. When people are exposed to too much information, they tend to withdraw from the decision-making process and reduce their efforts. (A lack of information, which one could call “underload” can have the same result, by the way, and is certainly just as dangerous).
In this case, the client left decision-making process to the bank but they failed to recognize that bank is a party to providing people with information about investment options, which may not be enough to produce rational and sound decisions.
Floundering in a maze of information opens people up to mis-selling and mis-buying. As a result, investors get really lousy, unsuitable investments foisted on them. In short, investors land up with investments that are lucrative only for the seller, or which are simply easy to sell and no trouble to manage.
Do you often take the “default option” too?
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