Articles #Investment

When it comes to making investment decisions, herding is a key factor. It's a behavioral pattern that affects a vast range of industries. During the last century, the American Economic Association was made up mostly of college professors of economics and the social sciences. But today, the membership has expanded to over 20,000 members. The problem with this pattern is that it can make investing a risky proposition.

Traditional economics teaches that any asset can be valued solely on fundamental metrics: cash flows, earnings, capital structure, and sales growth are all that matter. But in reality, we can see from today’s markets that this alone is not true. Fundamental analysis does not have a monopoly on valuations, and it constantly enters into a paradoxical state with its stories of expectations. When doing analysis, acting solely on fundamental analysis, without taking into account the principles of “behavioral economics,” may not protect you even in the long run.