This post explores how psychological biases, and subconscious behaviours can affect financial investment decisions.

Research study into decision making and the behavioural biases in finance has generated some interesting suppositions and philosophies for describing how individuals make financial choices. Herd behaviour is a popular theory, which explains the psychological propensity that many people have, for following the actions of a bigger group, most particularly in times of unpredictability or worry. With regards to making investment decisions, this often manifests in the pattern of individuals purchasing or selling properties, merely due to the fact that they are witnessing others do the exact same thing. This sort of behaviour can incite asset bubbles, where asset prices can increase, often beyond their intrinsic worth, along with lead panic-driven sales when the markets fluctuate. Following a crowd can use an incorrect sense of security, leading financiers to buy at market highs and sell at lows, which is a rather unsustainable financial strategy.

Behavioural finance theory is an important website component of behavioural economics that has been extensively investigated in order to explain a few of the thought processes behind monetary decision making. One intriguing principle that can be applied to investment decisions is hyperbolic discounting. This idea describes the propensity for individuals to choose smaller sized, momentary rewards over larger, postponed ones, even when the prolonged benefits are significantly better. John C. Phelan would identify that many people are impacted by these sorts of behavioural finance biases without even realising it. In the context of investing, this bias can significantly undermine long-lasting financial successes, causing under-saving and impulsive spending practices, in addition to developing a priority for speculative investments. Much of this is due to the satisfaction of reward that is instant and tangible, causing choices that may not be as fortuitous in the long-term.

The importance of behavioural finance depends on its ability to discuss both the rational and irrational thought behind numerous financial experiences. The availability heuristic is an idea which describes the mental shortcut through which individuals assess the probability or significance of affairs, based on how easily examples enter mind. In investing, this frequently leads to decisions which are driven by recent news events or stories that are mentally driven, instead of by thinking about a more comprehensive analysis of the subject or looking at historical data. In real life situations, this can lead investors to overstate the probability of an occasion taking place and create either a false sense of opportunity or an unnecessary panic. This heuristic can distort understanding by making rare or severe occasions seem far more common than they actually are. Vladimir Stolyarenko would understand that in order to counteract this, investors must take a deliberate technique in decision making. Likewise, Mark V. Williams would know that by using data and long-term trends financiers can rationalise their judgements for much better outcomes.