What To Tell Clients Who Want To Wait To Invest Until Volatility Eases
Behavioral economics explains that humans remember the highs and lows of recent experience but are generally fuzzy on the total experience.
The Peak-End rule says the value of an experience is “a simple average of the most extreme affect experienced during the episode (Peak) and of the affect experienced near its end (End),” writes Jaylene Howard, a consulting director for Russell Investments’ U.S. private client consulting group.
“Think about a rollercoaster ride you’ve taken, or even the past year – What do you vividly remember?” she asks. You remember the big drops and the end of the ride, not each moment of the ride.
Similarly, investors remember the market bottom of March 2009 and the recent market volatility. If you can get them to see the overall picture, their investing results over the long term, they will be less likely to make decisions based on emotions, she concludes.