Unveiling the Psychology Behind People and Investing: A Journey into Financial Decision Making

In the vast landscape of personal finance, investing can create long-term wealth and financial security. Yet, behind the numbers, charts, and strategies lies an interplay of human behavior that shapes how individuals approach investing. From the cautious to the adventurous, from the analytical to the intuitive, the world of investing reflects the diverse nature of human behavior and decision-making. In a recent Wall Street Journal article highlighting Daniel Kahneman, a Princeton University psychology professor, they talked about experiments he conducted showing that when presented with complex situations, people often rely on rules of thumb that can lead them to behave irrationally.1

The Fear Factor: Risk Aversion in Investing

Fear is a powerful emotion that can often dictate our financial decisions, especially when it comes to investing. Many individuals can be naturally risk-averse, believing there is more safety in familiar assets like savings accounts or bonds over the volatility of the stock market. This aversion to risk can stem from various sources, including past experiences of financial loss or general discomfort with uncertainty.

However, while avoiding risk may offer a sense of security in the short term, it can also hinder long-term wealth creation. As the saying goes, “There’s no reward in life without risk.” Investors can be more prudent when they understand their risk tolerance and manage them effectively to achieve their financial goals. Having a financial advisor diagnose your financial situation by analyzing your financial records and asking questions about your investing goals, risk tolerance, and preferences they can better understand your investing health and help educate you on investing decisions.

The Thrill of the Chase: The Allure of High-Risk, High-Reward Investments

On the opposite end of the spectrum are those who thrive on the adrenaline rush of high-risk, high-reward investments. These individuals are drawn to opportunities that promise substantial returns, often overlooking the potential downside. It’s important to keep in mind that high risk doesn’t always equate to high returns, investors often take on high risks that are not backed by empirically tested premiums.  Whether it’s day trading volatile stocks, investing in speculative cryptocurrencies, or participating in high-stakes ventures, the allure of quick wealth can be intoxicating. “Taking a risk does not always equate to a positive result, just because a golfer goes out on a golf course during a lightning storm (very risky) it is likely to have a less than desirable result,” states Mark Matson.

However, this pursuit of instant gratification can come at a cost. High-risk investments can carry a greater chance of loss, and the volatility of such assets can lead to emotional roller coasters for investors. Moreover, the line between calculated risk-taking and reckless gambling can blur, posing financial risks in the long run. Danny Kahneman reflects on how people don’t incorporate all available information. “They think short streaks in a random process enable us to predict what comes next. They think jackpots happen more often than they do, making them overconfident. They think disasters are more common than they are, making them suckers for schemes that purport to protect us.”1

The Analytical Mind: Investing Through Data and Research

For some investors, emotions take a back seat to rational analysis and meticulous research. These individuals approach investing with a methodical mindset, relying on data, financial metrics, and market trends to inform their decisions. They meticulously scrutinize balance sheets, study company fundamentals, and analyze macroeconomic indicators to identify promising investment opportunities.

This analytical approach can yield favorable results, as it is grounded in logic and evidence-based reasoning. However, it also requires a considerable investment of time and effort to gather and interpret relevant information accurately. Moreover, even the most thorough analysis cannot eliminate all risks, as unforeseen events and market fluctuations can still impact investment outcomes. In Jason Zweig’s article on Daniel Kahneman for the Wall Street Journal, he reflects on a profile he wrote on him in 2001, the year before Danny won the Nobel prize.1 “The most important question to ask before making a decision,” Danny says, is “What is the base rate?”1 He suggested that you start each significant decision by determining the likelihood of success objectively, considering the historical range of outcomes in comparable situations.1 If the base rate is 50/50, will you be unrealistically optimistic1 and risk your retirement?

Gut Feeling vs. Rationality: The Battle of Instincts in Decision Making

In the realm of investing, there is a perpetual tug-of-war between gut instincts and rational decision-making. While some investors rely on intuition and gut feelings to guide their choices, others prioritize logic and reason above all else. The debate between these two camps has raged on for decades, with proponents of each side arguing the merits of their approach.

Those who trust their instincts often cite their ability to “read” the market or sense shifts in investor sentiment before they become apparent through data analysis. On the other hand, supporters of rationality argue that emotions can cloud judgment and lead to impulsive decisions that undermine long-term financial goals. While some people may not be that bad at estimating risks and probabilities, “just as optical illusions fool the eye, cognitive illusions fool the mind.”1 According to Mark Matson, “No one can predict the future, and if they could, they wouldn’t tell you.”

Navigating the Complex Landscape of Investing

In the end, investing is as much an art as it is a science. It is a reflection of human behavior, shaped by a myriad of psychological factors ranging from fear and greed to logic and intuition. Understanding these dynamics is crucial for navigating the complex landscape of investing and achieving financial success.

Whether you’re a risk-averse saver, a thrill-seeking trailblazer, an analytical researcher, or an intuitive decision-maker, staying committed to your strategy and avoiding knee-jerk reactions to short-term fluctuations, investors can harness the power of compounding and benefit from the growth potential of their investments. Matson Money trains and develops investors to adopt a scientific approach, informed by empirically tested academic research in both statistical data and human behavior. We promote a disciplined and evidence-based vision for your financial future and provide education to stay prudently invested in the market. Even a Nobel-prize winner in economics admitted that “studying the pitfalls and paradoxes of the human mind didn’t make him any better at problem-solving than anybody else: ‘I’m just better at recognizing my mistakes after I make them.’”1 Danny states, “All of us would be better investors if we just made fewer decisions.”1

  1. Daniel Kahneman, Nobel-Winning Pioneer of Behavioral Economics, Dies at 90. Wall Street Journal.By Jason Zweig, March 27, 2024. Web Accessed April 22, 2024. https://www.wsj.com/finance/investing/daniel-kahneman-nobel-winning-pioneer-of-behavioral-economics-dies-at-90-56b8b5a9


Matson Money, Inc. “Matson” is a federally registered investment advisor with the Securities Exchange Commission (SEC) and has been in business since 1991. In Canada, Matson is registered as a portfolio manager in Ontario, Alberta, and British Columbia.  Registration with the SEC and the Canadian securities regulatory authorities does not imply their approval or endorsement of any services provided by Matson.

This content is not to be considered investment advice and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision.  

This content includes the opinions, beliefs, or viewpoints of Matson Money.  All of Matson Money’s advisory services are marketed almost exclusively by either Solicitors or Co-Advisors.  Both Co-Advisors and Solicitors are independent contractors, not employees or agents of Matson.  

Other financial organizations may analyze investments and take a different approach to investing than that of Matson Money.

All investing involves risks and costs. All investments involve the risk of loss, including the loss of principal.  These risks may not always be mitigated through long-term investing or diversification.  No investment strategy (including asset allocation and diversification strategies) can ensure peace of mind, guarantee profit, or protect against loss.    


Specific Risk: Specific risk, also known as nonsystematic risk is unique risk that is local or limited to a particular asset or industry that does not necessarily affect assets outside of that asset class. An example is news that affects a specific stock such as a sudden strike by employees.  Diversification is a key way to help protect yourself from nonsystematic risk. Matson Money clients are invested in securities with broad diversification in an attempt to eliminate nonsystematic risk, however, clients may still be subject to specific risk inside individual asset classes (micro-cap, emerging markets, etc.)

Country Specific Market Risk: Because [individual country’s name] index concentrates investments in that specific market, the [individual ’s country’s name] performance is expected to be closely tied to the social, political and economic conditions within that country, and is expected to be more volatile than the performance of funds with more geographically diverse investments.

Credit Risk:  Credit risk is the risk that the issuer of a security may be unable to make interest payments and/or repay principal when due. A downgrade to an issuer’s credit rating or a perceived change in an issuer’s financial strength may affect a security’s value, and thus, impact the investment portfolio’s performance. Government agency obligations have different levels of credit support and, therefore, different degrees of credit risk. Securities issued by agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the United States, such as the Federal Housing Administration and Ginnie Mae, present credit risk that is generally lower than other securities issued by other state or local agencies, or other public or private entities.  Other securities issued by agencies and instrumentalities sponsored by the U.S. Government, that are supported only by the issuer’s right to borrow from the U.S. Treasury, subject to certain limitations, and securities issued by agencies and instrumentalities sponsored by the U.S. Government that are sponsored by the credit of the issuing agencies, such as Freddie Mac and Fannie Mae, are subject to a greater degree of credit risk. U.S. government agency securities issued or guaranteed by the credit of the agency still involve a risk of non-payment of principal and/or interest. 

Cyber Security Risk: Matson Money and its service providers’ use of internet, technology and information systems may expose the investment advisor to potential risks linked to cyber security breaches of those technological or information systems. Cyber security breaches, amongst other things, could allow an unauthorized party to gain access to proprietary information, customer data, or fund assets, or cause the investment advisor and/or its service providers to suffer data corruption or lose operational functionality.

Emerging Markets Risk: Numerous emerging market countries have a history of, and continue to experience serious, and potentially continuing, economic and political volatility. Stock markets in many emerging market countries are generally relatively small, expensive to trade in and have higher risks than those in developed markets. Securities in emerging markets also may be less liquid than those in developed markets and foreigners are often limited in their ability to invest in, and withdraw assets from, these markets. Additional restrictions may be imposed under other conditions. Frontier market countries generally have smaller economies or less developed capital markets and, as a result, the risks of investing in emerging market countries are magnified in frontier market countries.

Equity Market Risk: Even a long-term investment approach cannot guarantee a profit or prevent a loss. Economic, market, political, and issuer-specific conditions and events, known as market risks, will cause the value of equity securities, and the investment strategies that own them, to rise or fall which will cause the value of your equity profile to rise or fall. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

Foreign Government Debt Risk: The risk that: (a) the governmental entity that controls the repayment of government debt may not be willing or able to repay the principal and/or to pay the interest when it becomes due, due to factors such as political considerations, the relative size of the governmental entity’s debt position in relation to the economy, cash flow problems, insufficient foreign currency reserves, the failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies, and/or other national economic factors; (b) governments may default on their debt securities, which may require holders of such securities to participate in debt rescheduling; and (c) there is no legal or bankruptcy process by which defaulted government debt may be collected in whole or in part.

Foreign Securities and Currencies Risk: Foreign securities prices may decline or fluctuate because of: (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets. Investors holding these securities are also exposed to foreign currency risk (the possibility that foreign currency will fluctuate in value against the U.S. dollar or that a foreign government will convert, or be forced to convert, its currency to another currency, changing its value against the U.S. dollar).

Fund of Funds Risk: The investment performance of client portfolios is affected by the investment performance of the underlying funds in which the portfolio is invested. The ability of the total client portfolio to achieve its investment objective depends on the ability of the underlying Matson-advised mutual funds to meet their investment objectives, on Matson’s decisions regarding the allocation of the portfolio’s assets among the underlying Matson-advised mutual funds, and on Matson’s decisions regarding investments made by the underlying Matson-advised mutual funds. The portfolio may allocate assets to an underlying fund or asset class that underperforms other funds or asset classes. There is no assurance that the investment objective of the portfolio or any underlying fund will be achieved. When the portfolio invests in underlying funds, investors are exposed to a proportionate share of the expenses of those underlying funds in addition to the expenses of the portfolio. Matson may receive fees both directly on your account as well as on the money your account invests in the underlying funds, and the underlying funds themselves may bear expenses of the mutual funds or ETFs in which they invest. Through its investments in the underlying funds, the portfolio is subject to the risks of the underlying funds’ investments, with certain underlying fund risks described later in this content. More information on mutual funds, ETFs, and associated fees, is available in fund prospectus documents, available online at: http://funddocs.filepoint.com/matsonmoney/.

Interest Rate Risk: Fixed income securities are subject to interest rate risk because the prices of fixed income securities tend to move in the opposite direction of interest rates. When interest rates rise, fixed income security prices fall. When interest rates fall, fixed income security prices rise. In general, fixed income securities with longer maturities are more sensitive to changes in interest rates.

Market Risk: Even a long-term investment approach cannot guarantee a profit or prevent a loss. Economic, political, and issuer-specific events, known as market risks, will cause the value of fixed income securities to rise or fall.

Small Company Risk: Securities of small public companies with a total market capitalization (market value) of $300M to $2B are known as small-cap companies. Publicly traded companies with a total market capitalization (market value) of $50M to $300M are known as micro-cap companies.  Both small-cap and micro-cap companies are often less liquid than those of large companies which can make it difficult to sell the securities of small-cap or micro-cap companies at a desired time or price. As a result, small-cap and micro-cap company stocks may fluctuate relatively more in price. In general, these companies are also more vulnerable than larger companies to adverse business or economic developments and they may have more limited resources.

Value Investment Risk: Value stocks are stocks of publicly traded companies that tend to trade at a “value price” compared to a company’s financials. These stocks may perform differently from the market. Following a value-oriented investment strategy may cause client portfolios to underperform equity investment strategies.