In Finance 405 (Retirement Planning) this week, we're discussing the concept of behavioral finance. Behavioral finance is defined as "a field of study that applies the use of scientific research techniques to understand social, cognitive, and emotional biases that affect and influence economical decision making and is concentrated on the decisions of individual and collective economic agents and study whether the decisions they make are entirely rational or seem to lack rationality.
In other words: are financial choices made rationally, or are they made out of emotion? For instance, when we choose our investments and our savings plans, do we tend to "play it safe" out of fear of current market conditions? Do we make only the minimum contributions towards our futures, reasoning that we don't want to put all of our money into investments and/or savings plans that seem risky? At first glance, this seems like smart, reasonable planning; after all, having watched the market and the economic crisis that has swept the nation (that almost rivals the Stock Market Crash of '29 and the Great Depression shortly thereafter), it would be considered foolish to put money into a risky investment or savings plan (such as a 401(K)). However, what happens in the long run is that individuals often find themselves ill-equipped at retirement and that they cannot take it easy the way they imagined they would. So it pays to do research and make the best decision based on investigating and weighing the pros and cons of any type of investment or savings plan. This way, you'll always make the decisions that are rational and provide a buffer for you at retirement.
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