Finance forum: Behavioural finance 23 articles - 39.774 readings

“Behavioural finance” is a sector of economics and neuro-economics that deals with financial decision-makers from a specific perspective. The thing is, market actors don’t always make rational decisions, both because of the lack of complete information in a situation and because of crucial factors stemming from emotional interactions. Behavioural finance has to do with identifying the constants of human behaviour that are due to these factors – with the aim of providing analyses and predictive models for these behaviours. Follow me

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Learning to interpret your own emotions and those of the markets when investing

Behavioural finance

According to experts, the role of emotions when investing should never be neglected: as the ‘Wall Street Journal’ states, it would be important in this respect not only to control emotions but also to learn how to interpret them. Interpreting the emotions of the markets to one's advantage What does it mean to be rational when investing in the financial markets? As Jason Zweig writes in the Wall Street Journal, being rational when investing does not mean neglecting emotions: it ...

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Negativity bias and its negative impact on investments

Behavioural finance

Not all investors may be aware that the human tendency to pay more attention to negative news than to positive news is known in behavioural economics (including behavioural finance) as negativity bias. But what are its implications and how can its risks be avoided? The negativity bias The negativity bias is a cognitive distortion that leads people to give more weight to negative information than to positive information. The reasons for this automatism are evolutionary: those who paid more atte ...

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Same money, different value: the paradox of mental accounting

Behavioural finance

Mental accounting is a phenomenon that leads us to assign different values to the same amount of money. Let's take a closer look at what it is. An experiment by Kahneman and Tversky When people talk about mental accounting, they often refer to an experiment conducted by Daniel Kahneman and Amos Tversky. In the experiment, respondents are presented with two situations in which a person is about to attend a theatre performance (but the example could apply to a rock concert, a film, and so on ...

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How to avoid the trap of recency bias

Behavioural finance

Even those who invest in the markets run the risk of making a common mistake, studied by behavioural finance, due to a cognitive bias that leads them to overestimate the importance of certain information due to its proximity in time. What is recency bias and how does it relate to availability bias? The perspective from which we evaluate information can be crucial. This becomes clear when we consider the so-called 'recency bias', i.e. the distortion caused by the temporal proximity of a ...

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Anchoring: even in finance (unfortunately), first impressions count

Behavioural finance

It is said that first impressions count. Unfortunately, this maxim also applies to some extent in the financial world. The so-called 'anchoring' effect is difficult to influence, but not trying risks unnecessary losses for investors' portfolios. What is anchoring? Benchmarks are powerful tools for making judgments and decisions. In the financial world, for example, many investment products are required to publish the benchmark. However, many investors tend to find benchmarks that c ...

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In finance, quality of information is an asset, quantity a risk

Behavioural finance

Thanks to the internet, information has never been more accessible. However, when it comes to specialised fields such as finance, this situation can have drawbacks (also studied by behavioural finance) that can lead people to make costly portfolio decisions. Spencer Jakab writes about this in the Wall Street Journal. Information overload leads to overconfidence in decisions Financial information comes with risks, particularly the risk of developing overconfidence in one's own knowledge, a ...

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Investing, emotions should be controlled, not extinguished

Behavioural finance

Investing in the financial markets is a complex business, made even more so when the natural emotional component of human beings is taken into account. This is where behavioural finance comes in, as well as strategic financial planning and appropriate diversification of investment portfolios based on specific parameters. Emotions are natural, but they also pose risks to portfolios Investing is an activity that involves strong emotions and is only natural. As SignatureFD Chief Advisor Tim Maure ...

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Overconfidence is a risk for investors

Behavioural finance

Overconfidence is one of the risks detected by behavioural finance. It can lead, among other things, to neglecting adequate portfolio diversification or becoming involuntary speculators. Here are some considerations of two experts in the field, also reported by Greg Iacurci in an article for 'CNBC'. The risk of overconfidence in one's own financial knowledge In a study by the American Financial Industry Regulatory Authority (FINRA), 64% of the sample of investors surveyed rated the ...

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Investing: the fear of losing money can be a risk

Behavioural finance

It is normal to be afraid of losing all or part of one's investments or savings. However, this fear does not always make us make the best choices in the financial sphere: on the contrary, in certain cases, as behavioural finance explains, this emotion can prove to be a risk for investment returns. Greg Iacurci also writes about this in an article that appeared in 'CNBC', from which we take up some considerations. Emotions are ill-suited to complex contexts such as financial markets ...

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