How behavioural finance can help you manage forex volatility better

Behavioural finance provides useful lessons for dealing with the volatility of foreign exchange markets and managing risksAt the heart of behavioural finance is the idea that we all suffer from certain cognitive biases that prevent us from making rational decisions. Picture: SUPPLIED/INVESTEC/GETTYIt’s hard to make forecasts, especially about the future, goes the old saying , and anyone in the foreign exchange market will understand the pitfalls of trying to predict exchange rates.

As we’ve seen, sentiment around these drivers can change rapidly, rendering even the best econometric models futile at times. But understanding behavioural finance can help.What is behavioural finance? We don’t want to stand out from the crowd when we make a wrong decision, but we are happy to be wrong with the rest of the market, even though the economic result is the same.We don’t want to stand out from the crowd when we make a wrong decision, but we are happy to be wrong with the rest of the market, even though the economic result is the same. Just because the coin has shown tails for five throws in a row, doesn’t mean the sixth will be tails.

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