The Flaws of Our Financial Memory
Posted: 11 Dec 2009 Last revised: 23 May 2019
Date Written: December 9, 2009
Our cognitive abilities like memory, perception, self-reflection etc. are highly evolved, but maladapted to the challenges of modern life. In this article the most common flaws of memory are described and it is shown how these flaws of memory might impact our recollection of financial events and decisions in the past. Faulty, inexistent or inadequate memory might give rise to sub-optimal financial decisions today and impair our ability to learn from the past. Thus, financial professionals and investors alike need to be aware of these flaws of memory and develop ways to mitigate their negative impact. Two techniques (investment policy statements and investment diaries) seem particularly promising in dealing with these problems. At the same time these techniques may be proactively used as a defense against unethical practices that try to exploit these flawed memories.
Keywords: Memory, cognitive risk management, behavioral decision making
JEL Classification: D10, D18, D83
Suggested Citation: Suggested Citation