Behavioural finance has a problem. People talk about it a lot, but use it a little. If anything, improvements in technology and communication has made good investment behaviour even more challenging. Both the temptation and ability to make bad choices has never been greater. The central issue that behavioural finance faces is that – at its core – it is asking investors to stop doing things they inherently and instinctively want to do (and are in many cases are paid to do). That is an exceptionally hard sell.

If we take a deliberately simplistic approach to grouping some of our most problematic investing behaviours, we can see what makes adhering to the lessons of behavioural finance quite so tough:

We do things that are emotionally satisfying and anxiety reducing: Many of our actions – such as selling poorly performing funds or assets, or reacting to short-term market events – make us feel much better in the moment.

We do things that play to our ego: We want to believe that we are better than other people and this overconfidence leads us to engage in activities with horrible odds such as market timing,

We do things because of what other people are doing: We are social animals and take decisions because we want to be like other people or compare favourably to them.

We do things that are easy: We are cognitive misers and prefer simple explanations. That’s why we are so keen to translate a complex financial world into simple stories.

We do things that had evolutionary benefits: This one could really cover everything. Most of our worst investing behaviours are effective evolutionary adaptions and useful in many other contexts. Worrying about the short term and obsessing over recent events is great for our survival but not so good for meeting our long-term investing outcomes.

Viewed through this lens it is easy to see why encouraging people to think more about their behaviour is such a challenge. We are asking them to do the following:

• Stop doing things that give them immediate satisfaction and reduce stress.
  
• Accept that they are not as smart as they think they are.
  
• Stop looking at what other people are doing.
  
• Accept that markets are complex and unpredictable.
  
• Ignore most of what has your attention right now.

The idea that applying behavioural finance concepts is easy is nonsense. It is far far easier to give in to our ingrained dispositions which are natural and make us feel good – that’s why everyone does it. Improving our investing behaviour means going against our own instincts and often what other people are doing.

What makes matters worse is that the industry encourages and validates our natural and problematic behaviours. Lots of value accrues to turnover, stories, short termism and irrelevant comparisons. When I say value, I mean fees – not performance.

Another issue is that applying behavioural finance concepts has no immediate payoff, so it can be difficult to articulate its true worth. Any value that will accrue will take time and there is no obvious counterfactual. There is no benchmark for the poor decisions we would have made without it (a problem made harder by the fact they we will never accept that we would have made those poor decisions).

It is important to remember that behavioural finance would be redundant if it were easy; if it wasn’t hard it wouldn’t be useful.

Applying behavioural finance well is a skill. One that involves developing a plan that will ask us to act against what we think is our better judgement. We will struggle to evidence its value and there will be times when it looks like it doesn’t work at all – “why did you tell me to sit through a bear market when I could have got out at the top!?”

Absolutely integral to accruing the benefits of understanding and managing our behaviour is moving away from the idea that it is about simply doing nothing and ignoring markets. This might work for some but for most it is not realistic. Instead, it is about defining which types of behaviour add value and identifying those which are destructive ahead of time. This requires constant work and effort. It is not solely about creating disciplines but also continually reaffirming why they are in place. The concepts will be incessantly stress tested by fluctuating markets and ever-changing narratives.

Our default state is to disregard the lessons of behavioural finance. It is simply how we are wired. There are, however, huge benefits to be unlocked if we can take the time and effort required to engage with them. Our behaviour remains the most important factor influencing our long run investing outcomes, let’s not ignore it.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).