A Case Study In Behavioral Finance


Posted in: Economics, General, Stock Market, Thought of the Week

Last week, worries over the financial health of a Portuguese bank spooked global markets, which sent them downwards. The concern stemmed from a missed payment on short-term debt issued by the country’s second largest lender, which then sparked fears over a possible contagion in the European financial sector. Please note that Portugal accounts for .14% of the global market, which is roughly 1/10th the size of Italy. How can a single bank in Portugal cause billions of dollars in equity value to simply disappear?

Our Investment Committee created a case study to analyze and explain why markets react so irrationally to something that is not a big deal. Behavioral Finance is a field of study that combines psychology, economics, and finance to offer an explanation for why investors make irrational financial decisions. Our emotions are powerful forces that often override logical conclusions, and this struggle typically leads to suboptimal results. The purpose of this case study is to show how an investor can take advantage of irrational behavior and reap large profits. We highly recommend that you read the case study because it will be worth your time and you may just learn a few things.

Read this week’s Thought of the Week to learn more about the affect of Portugal on the global economy.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.