Effective 2025,  The Triopay Unit Trust has been renamed the Mirador Income and Stability Fund.  This name more accurately conveys the fund’s true objective, purpose and benefits. Likewise, any referral to a Triopay process, system, or program etc. refers to the Mirador Income and Stability process, system, or program etc..

Mirador Real Advice Blog

Behavioral Finance

By Stan Clarke, February 2025

This Blog post is about the impact of behavioral finance and investor personality on investment decisions, highlighting the emotional and logical aspects of investing.

Behavioral finance became a popular investment topic largely due to the work of academics Daniel Kahneman and Amos Tversky.  In 1979, Daniel and Amos developed a theory of behavioral economics called Prospect Theory that dealt with economic judgment and decision making.  Their theory was instrumental in their winning of the 2002 Nobel Memorial Prize in Economics.

As you would expect from accomplished and well-respected academics, their work was extensive and detailed.  I will summarize the two aspects most applicable to investors preparing for retirement or already in their retirement investment lifecycle.  The first behavioral finance tenant most applicable to investment decision making was the importance of emotions in people’s decision-making process.  Daniel and Amos identified a number of personal biases that affected investors’ decision making, usually in a negative way.  The second most important tenant to our application was how, when faced with complex decisions, people often reverted to heuristics – “rules of thumb” that are adopted to make life more manageable, but they often are not accurate or based on sound, researched logic, so instead they often make decisions worse.

Investment personality was a term that I coined around 2007 when I started Mirador.  I was intrigued by the behavioral finance subject.  At the time I had been in the investment industry for over 15 years, and I already had many first-hand experiences of how biases and heuristics had resulted in what I sometimes had just called “stinky thinking”.   But I was disappointed with the lack of application and solutions to the behavioral finance issues.

Application

So, I developed an in-depth survey that was designed to identify each individual’s most problematic biases and heuristics.  This in-turn could be used as an additional input to help formulate an individually customized investor wealth plan and portfolio solution.

Solution

The solution to what we learned courtesy of Kahneman and Tversky was to eliminate, or at least greatly reduce, the emotions, biases, and heuristics from investment and portfolio management decision making.  The best way to do this is to develop and strictly apply statistical models and processes using the best data and data analysis tools. This keeps decision making focused on the logical aspects of company finances and results – the facts and numbers of corporations that lead to successful investment results. 

In the investment management world, this is referred to as quantitative and technical analysis.  I have been focused on this style of investing since the late 1990s.  Mirador’s proprietary quantitative analysis and time-tested models identify the investments we should own, and our proprietary technical analysis and neural networks guide us to the timing of transactions in these investments.

To Summarize:

  • Human Emotions and Decision Making: Humans are emotional beings, often relying on emotions for final decisions, especially in matters of money and finance, which hold significant emotional value due to their impact on survival, family, and goals.
  • Impact of Financial Media: The financial media often adds to market irrationality through emotional and heuristic-driven content, leading to poor investment decisions among investors who trust media “experts”.
  • Challenges of Decision Making: Decision making can be overwhelming due to the constant need to make choices in a modern, capitalist society, leading to stress and a reliance on emotions, making humans poorly suited for investment decisions without a structured framework.
  • Emotion in Markets: The price movements in markets are influenced by the collective emotional decisions of buyers and sellers, resulting in markets that are often irrational and chaotic.
  • Logic in Business: Business management and valuation rely on logical, mathematical measures such as sales revenue, costs, and earnings, requiring the application of statistics and probabilities for future projections.
  • Investment Strategy: Successful portfolio management requires understanding investor emotions and market data, combining behavioral finance to capitalize on market inefficiencies and computational finance for logical insights.
  • Mirador’s Independent Approach: Mirador avoids financial media and relies on data modeling and analysis to provide high income with stability for retired and pre-retirement investors, focusing on personalized service and behavioral finance concepts.
  • Mirador’s Singular Focus and Behavioral Finance:  Mirador does one thing: wealth advice and portfolio management for high income and comfortable stability – which is what people in their pre-retirement and retirement lifecycle stages need. We have found that this income investing, as opposed to “hoping for growth” investing, is also an excellent solution to many of the emotions, biases and heuristics of investing.  Getting paid now – cash in your jeans now rather than hope in your closet, and reducing volatility to provide a more comfortable investment experience leaves our client’s with fewer emotions about the markets other than happiness, comfort and confidence.