Taking a look at some of the thought processes behind making financial choices.

Research into decision making and the behavioural biases in finance has generated some interesting suppositions and philosophies for explaining how people make financial decisions. Herd behaviour is a widely known theory, which describes the mental tendency that many individuals have, for following the actions of a bigger group, most especially in times of unpredictability or fear. With regards to making investment choices, this frequently manifests in the pattern of people purchasing or selling assets, simply due to the fact that they are seeing others do the same thing. This type of behaviour can incite asset bubbles, where asset prices can increase, often beyond their intrinsic worth, as well as lead panic-driven sales when the markets fluctuate. Following a crowd can provide an incorrect sense of security, leading investors to purchase market highs and resell at lows, which is a relatively unsustainable financial strategy.

Behavioural finance theory is an important component of behavioural economics that has been widely looked into in order to describe some of the thought processes behind financial decision making. One intriguing principle that can be applied to investment decisions is hyperbolic discounting. This concept describes the propensity for individuals to choose smaller sized, immediate benefits over bigger, delayed ones, even when the delayed benefits are substantially better. John C. Phelan would acknowledge that many people are affected by these sorts of behavioural finance biases without even realising it. In the context of investing, this predisposition can more info badly undermine long-term financial successes, causing under-saving and spontaneous spending habits, in addition to producing a concern for speculative investments. Much of this is due to the satisfaction of benefit that is immediate and tangible, resulting in decisions that might not be as opportune in the long-term.

The importance of behavioural finance lies in its capability to discuss both the rational and unreasonable thought behind different financial experiences. The availability heuristic is a principle which describes the psychological shortcut in which individuals examine the possibility or significance of events, based upon how easily examples enter mind. In investing, this often results in choices which are driven by current news occasions or narratives that are emotionally driven, instead of by thinking about a wider interpretation of the subject or taking a look at historical data. In real world situations, this can lead investors to overstate the likelihood of an event happening and produce either an incorrect sense of opportunity or an unwarranted panic. This heuristic can distort perception by making uncommon or extreme events seem to be much more typical than they really are. Vladimir Stolyarenko would understand that in order to counteract this, investors must take an intentional approach in decision making. Likewise, Mark V. Williams would know that by using data and long-lasting trends financiers can rationalise their judgements for better outcomes.