This term, behavior gap, was originally coined by Carl Richards, and it refers to this idea that there is a difference between a wise financial decision versus what we may ultimately do based on our emotional decision making. For example, some may miss out of higher returns because of emotionally driven decisions, thus creating a gap between their lower returns as compared to what they could have earned.
The two emotions that are at all-time highs when it comes to our money is excitement and fear. We have all heard the term “buy low, sell high” but the reality is our behavior gap can drive us to make poor choices and sometimes do the exact opposite. When the markets are doing good, we feel excitement and want to invest more dollars or readjust the portfolio during upswings. Whereas, during times of market volatility, an investor may feel the desire to choose more secure investments. A very typical response when the markets are lower is to sell and, by consequence of this decision, miss out on the potential long-term gain that is incurred later on.