Jake Kagele is an established Tucson, AZ, investment professional who guides NOVA Financial Services and provides client-driven asset-allocation strategies. Having completed Certified Investment Management Analyst (CIMA) certification at the Wharton School at the University of Pennsylvania, Jake Kagele undertook intensive coursework that delved into areas such as investment policy and behavioral finance.

Focused on the psychology of market behaviors, the latter topic seeks to find an explanation for actions by investors that often seem to be irrationally grounded. Areas of irrationality include biases and cognitive errors that can lead to subpar decisions, as well as limits to self-control, even when in possession of knowledge that would lead to optimal decisions.

One classic manifestation of such irrationality is “herd behavior” that may be based on rumor and the actions others take, and not reflect the reality of the situation at hand. An example is when news of an imminent corporate lawsuit causes investors to shed shares in a specific company. This then initiates a chain reaction across similar companies in the same industry. Because this happens before any action or judgment has been rendered, it is a market movement with imperfect knowledge as a basis.

The positive aspect of this is that savvy investors can often take advantage of others’ herd behavior to identify undervalued stocks and find long-term strategies for outperforming the market.