From the outset, behavioral finance has focused on documenting the irrational financial behavior of human beings, and even today, says Daniel Crosby, founder and president of Atlanta-based behavioral finance consulting firm, IncBlot, the science is still largely centered on highlighting the mistakes people make with respect to financial planning.
Crosby believes that people—financial advisors and the general investing public—have begun to tire of the seemingly endless litany of flaws (“I have counted 117 well-documented irrationalities or behavioral biases,” he said.) that behavioral finance has highlighted and are ready for something else.
“We’re at a point where behavioral finance needs to go in a new direction, one that answers the questions ‘so what’ and ‘now what,’” he said.
Crosby set up IncBlot to try to answer those questions and to be a part of what he believes is the important and necessary transition of behavioral finance from theory to practice—a change that will allow financial practitioners to use the science in a more meaningful, useful and realistic manner.
He firmly believes that behavioral finance needs to stop uncovering new ways in which human behavior can spoil proper and logical financial planning, and instead focus on whittling the already existent body of knowledge down to a decent and workable universe that will enable greater practicality.
“Today, we know that there are 117 ways to mess things up, and that’s all fine, but what are the two or three big pillars that account for the majority of these biases?” he asked. “Winnowing that knowledge down to […] a manageable universe of the ways in which we make mistakes will make it that much easier for everyone, particularly for financial advisors, who’ll find it easier to incorporate behavioral finance at every step of the investing process,” he said.
More importantly, though, Crosby believes that behavioral finance must seek to cast both investing and investors in a more positive light than it has done up to now, and that the science needs to evolve in such a way so that it highlights the more positive aspects of human financial behavior.