The concept of the rational investor has come under attack in recent years with the rise of neuroeconomics. It seems that we bring many biases, illusions, and other irrational thinking with us when we make investment choices. What does this make of my oft-stated belief that investors should strive to control their emotions and make rational decisions?
I’ve been told that because we now have strong evidence that investors are driven by so many emotions, my support for rational investing is passé. I don’t dispute the lessons of neuroeconomics; investors have many biases and often make emotional investing decisions.
However, just because we do make emotional choices doesn’t mean that we are best off investing this way. Even if we need to understand the emotions of others to best understand equity markets, we still do better as investors to push emotions aside and make rational choices that take into account the irrationality of others.
Studying neuroeconomics is fascinating. It gives great insight into why markets behave as they do. It also shows us what mistakes we should try to avoid. Investing rationally is the best approach.