Economics seminar: The Foundations of Successful Financial Decision Making

Retail investors are playing a growing role in financial markets, so understanding what determines good investment decisions is important. The findings contribute to a better understanding of investment decisions, also relevant for professional investors and financial regulators. This study combines three novel data sets on trading behavior, psychological constructs, and neuro-biological markers. There is no positive correlation between portfolio variance and returns, opposed to the presumed risk-reward trade-off. While portfolio returns show a low temporal stability, portfolio variances has a high one, i.e. is more predictable. Risk aversion and self-control are associated with reduced portfolio variance, while present biases are associated with increased variance. Only exploratory links were found between neural signals encoding monetary rewards and risks and portfolio outcomes. In sum, the results of our comprehensive interdisciplinary investigation suggest that the key driver of the investment success is the ability to manage risk.