The Astonishing Way Economics Could Impact Your Investments

It is no surprise that economics, with its intertwined principles, theories and abundant real-world examples, can have a staggering influence on the outcomes of investments. We can look to the past, to prominent economists like Adam Smith, whose insights into the nature of supply and demand informed our understanding of how prices would be affected by rational decision-making. In the present, we can observe how the seeds Smith planted 250 years ago continue to feed our knowledge of how investments work.

For instance, behavioral economics, a field of study rooted in Smith’s work, has provided illuminating observations about the irrationality of investors, such as exhibiting overconfidence, or “jumping in” and out of the markets at the wrong times. Likewise, our understanding of investor sentiment has changed in response to trends like “news trader bias,” or the tendency of investors to make decisions based on what they perceive as headlines of the present.

Further, economic theory has been instrumental in bringing attention to the power of diversification and asset allocation. Allocating assets in a balanced and judicious way can aid investors in minimizing risk and maximizing returns. Overall, the power of economics to shape the way we invest is unmistakable.

We cannot help but be astonished with the power of economics to change or inform our decisions, in the present or in the past. As investors, it is our responsibility to stay on top of the latest developments in economic theory, for the sake of our financial success.

• Economics
• Investment
• AdamSmith
• BehavioralEconomics
• Diversification
• AssetAllocation