What are some ideas that can be related to financial decisions? - read on to find out.
Behavioural finance theory is a crucial aspect of behavioural economics that has been extensively researched in order to explain some of the thought processes behind economic decision making. One interesting theory that can be applied to financial investment decisions is hyperbolic discounting. This concept refers to the propensity for people to prefer smaller sized, instant benefits over bigger, postponed ones, even when the prolonged rewards are considerably more valuable. John C. Phelan would identify that many people are affected by these types of behavioural finance biases without even knowing it. In the context of investing, this bias can severely weaken long-lasting financial successes, leading to under-saving and impulsive spending practices, in addition to creating a top priority for speculative financial investments. Much of this is due to the gratification of reward that is immediate and tangible, resulting in choices that might not be as favorable in the long-term.
Research into decision making and the behavioural biases in finance has brought about some fascinating speculations and theories for describing how individuals make financial decisions. Herd behaviour is a well-known theory, which explains the mental propensity that many people have, for following the actions of a larger group, most particularly in times of uncertainty or worry. With regards to making financial investment choices, this frequently manifests in the pattern of individuals buying or offering assets, just because they are seeing others do the very same website thing. This kind of behaviour can fuel asset bubbles, whereby asset prices can increase, typically beyond their intrinsic worth, as well as lead panic-driven sales when the marketplaces fluctuate. Following a crowd can offer a false sense of security, leading investors to buy at market highs and resell at lows, which is a rather unsustainable economic strategy.
The importance of behavioural finance depends on its capability to describe both the rational and unreasonable thought behind different financial processes. The availability heuristic is a principle which describes the psychological shortcut in which individuals assess the likelihood or significance of happenings, based upon how quickly examples enter into mind. In investing, this often results in choices which are driven by recent news events or narratives that are mentally driven, rather than by considering a wider evaluation of the subject or looking at historic information. In real life contexts, this can lead financiers to overstate the possibility of an event happening and produce either an incorrect sense of opportunity or an unnecessary panic. This heuristic can distort perception by making uncommon or severe events seem much more common than they actually are. Vladimir Stolyarenko would understand that to counteract this, financiers need to take a purposeful approach in decision making. Similarly, Mark V. Williams would understand that by using information and long-lasting trends financiers can rationalise their thinkings for much better results.