Rules of thumb
Has the human brain evolved to cope with decisions around lending, investing and other “high finance” choices? Economist Tim Harford blogs that it hasn’t but one way to aid understanding might be adopting rules of thumb. A well-known rule of thumb is subtracting your age from 100, with the result a guide to the proportion of shares to hold when investing. Harford writes that another is having maximum debt payments of 36% of gross income. A warning though: rules of thumb are very simplistic and do not take individual circumstances into account.
Low risk – high return?
The traditional view of the risk:return relationship is that high risk investments are linked to high returns (and low risk to low returns). But Bucharest University of Economic Studies’ Adrian Mitroi challenges this in his 2014 paper on behavioural finance. He highlights errors investors tend to make in managing their portfolios and says emotion and non-rational decisions play a big role.
Learn Money Week
United Kingdom-based financial education charity MyBnk is running Learn Money Week from 10-17 March, aimed at helping 11-25 year olds tackle personal finance issues. According to research by MyBnk, one-in-ten young people thought that an ISA – which stands for an Individual Savings Account – was an energy drink and one-in-six thought it was an iPod accessory.