Looking at financial behaviours and making an investment

This article checks out how mental predispositions, and subconscious behaviours can influence financial investment decisions.

Behavioural finance theory is an essential component of behavioural science that has been widely looked into in order to discuss some of the thought processes behind financial decision making. One fascinating theory that can be applied to investment choices is hyperbolic discounting. This concept describes the propensity for people to choose smaller sized, instantaneous rewards over larger, delayed ones, even when the delayed rewards are considerably better. John C. Phelan would acknowledge that many individuals are impacted by these . types of behavioural finance biases without even realising it. In the context of investing, this predisposition can severely weaken long-lasting financial successes, causing under-saving and spontaneous spending practices, as well as creating a priority for speculative financial investments. Much of this is because of the satisfaction of benefit that is instant and tangible, causing choices that may not be as opportune in the long-term.

The importance of behavioural finance lies in its ability to explain both the reasonable and illogical thinking behind various financial processes. The availability heuristic is a concept which explains the mental shortcut in which individuals examine the likelihood or importance of events, based on how quickly examples enter into mind. In investing, this frequently leads to choices which are driven by recent news events or narratives that are mentally driven, rather than by thinking about a wider evaluation of the subject or looking at historical information. In real world situations, this can lead financiers to overstate the likelihood of an event happening and develop either an incorrect sense of opportunity or an unnecessary panic. This heuristic can distort understanding by making rare or severe events seem to be far more common than they really are. Vladimir Stolyarenko would understand that in order to counteract this, financiers need to take a deliberate approach in decision making. Likewise, Mark V. Williams would understand that by utilizing information and long-term trends financiers can rationalise their thinkings for much better results.

Research into decision making and the behavioural biases in finance has resulted in some interesting speculations and philosophies for discussing how individuals make financial decisions. Herd behaviour is a widely known theory, which explains the mental tendency that lots of people have, for following the actions of a bigger group, most especially in times of uncertainty or fear. With regards to making investment choices, this frequently manifests in the pattern of individuals buying or selling assets, just due to the fact that they are witnessing others do the same thing. This kind of behaviour can incite asset bubbles, where asset values can rise, typically beyond their intrinsic worth, in addition to lead panic-driven sales when the marketplaces fluctuate. Following a crowd can provide an incorrect sense of safety, leading investors to purchase market highs and resell at lows, which is a relatively unsustainable economic strategy.