Buy low. Sell high. That's what a smart, rational investor is supposed to do. And most of us want to do that. But it's not that simple.
Emotions often get in the way. And that's what behavioural finance - the study of decision making in investors - tells us. People, it turns out, are not as predictable as once thought when it comes to finance.
'Under risk and uncertainty people make decisions differently,' said Lynn Pi, adjunct associate professor of the School of Business and Management at the Hong Kong University of Science and Technology. That is why people may know they will lose money but still invest.
'Studies in the financial markets found that there are anomalies and unresolved puzzles that cannot be explained or contradict traditional finance theories,' said Dr Pi.
In traditional finance when there's risk and uncertainty, people demand a premium. A lot of the risk and return trade-off analysis follows this. It is understood that people would demand a higher return or a higher premium to compensate for a higher risk.
This had been going on for a long time until people found inconsistencies with this established model of behaviour. It was also believed that people always prefer less risk than higher risk. That's also not the case.