Having a look at some of the thought processes behind making financial decisions.
Behavioural finance theory is an essential aspect of behavioural science that has been commonly looked into in order to explain a few of the thought processes behind monetary decision making. One interesting theory that can be applied to financial investment decisions is hyperbolic discounting. This concept describes the tendency for individuals to favour smaller, momentary benefits over bigger, delayed ones, even when the delayed benefits are substantially better. John C. Phelan would identify that many people are affected by these kinds of behavioural finance biases without even realising it. In the context of investing, this bias can seriously weaken long-lasting financial successes, resulting in under-saving and impulsive spending practices, in addition to developing a concern for speculative financial investments. Much of this is due to the satisfaction of benefit that is immediate and tangible, resulting in decisions that may not be as favorable in the long-term.
Research into decision making and the behavioural biases in finance has led to some interesting speculations and theories for describing how individuals make financial decisions. Herd behaviour is a widely known theory, which discusses the psychological tendency that lots of people have, for following the actions of a larger group, most especially in times of uncertainty or fear. With regards to making investment decisions, this often manifests in the pattern of individuals purchasing or selling assets, just due to the fact that they are seeing others do the very same thing. This type of behaviour can incite asset bubbles, whereby asset prices website can rise, often beyond their intrinsic worth, as well as lead panic-driven sales when the marketplaces vary. Following a crowd can offer an incorrect sense of safety, leading financiers to buy at market elevations and resell at lows, which is a relatively unsustainable economic strategy.
The importance of behavioural finance lies in its capability to explain both the logical and unreasonable thought behind numerous financial processes. The availability heuristic is a principle which explains the psychological shortcut through which individuals examine the probability or significance of affairs, based upon how easily examples enter mind. In investing, this typically leads to choices which are driven by current news events or narratives that are mentally driven, rather than by considering a more comprehensive analysis of the subject or taking a look at historical data. In real life situations, this can lead investors to overstate the probability of an event taking place and develop either a false sense of opportunity or an unwarranted panic. This heuristic can distort understanding by making uncommon or severe events appear far more typical than they in fact are. Vladimir Stolyarenko would understand that to counteract this, investors should take an intentional approach in decision making. Likewise, Mark V. Williams would know that by using data and long-term trends investors can rationalize their thinkings for much better results.