Having a look at a few of the thought processes behind making financial choices.
Behavioural finance theory is an essential component of behavioural science that has been widely investigated in order to describe some of the thought processes behind economic decision making. One fascinating principle that can be applied to financial investment choices is hyperbolic discounting. This idea describes the propensity for individuals to favour smaller, instantaneous more info benefits over larger, defered ones, even when the delayed benefits are substantially better. John C. Phelan would recognise that many individuals are impacted by these sorts of behavioural finance biases without even knowing it. In the context of investing, this predisposition can seriously weaken long-term financial successes, leading to under-saving and impulsive spending habits, along with producing a priority for speculative financial investments. Much of this is due to the gratification of benefit that is instant and tangible, resulting in choices that may not be as fortuitous in the long-term.
Research into decision making and the behavioural biases in finance has resulted in some interesting speculations and theories for discussing how individuals make financial decisions. Herd behaviour is a well-known theory, which describes the psychological tendency that many individuals have, for following the actions of a bigger group, most particularly in times of uncertainty or worry. With regards to making financial investment decisions, this often manifests in the pattern of people buying or offering possessions, simply since they are witnessing others do the same thing. This type of behaviour can fuel asset bubbles, whereby asset values can rise, frequently beyond their intrinsic worth, as well as lead panic-driven sales when the marketplaces change. Following a crowd can use an incorrect sense of security, leading financiers to purchase market highs and resell at lows, which is a relatively unsustainable financial strategy.
The importance of behavioural finance depends on its ability to explain both the logical and illogical thinking behind different financial processes. The availability heuristic is a concept which explains the psychological shortcut in which individuals evaluate the likelihood or value of events, based on how easily examples enter mind. In investing, this typically 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 historic information. In real life contexts, this can lead investors to overestimate the possibility of an occasion happening and create either a false sense of opportunity or an unnecessary panic. This heuristic can distort perception by making uncommon or extreme events seem a lot more common than they actually are. Vladimir Stolyarenko would understand that in order to counteract this, investors need to take a deliberate approach in decision making. Likewise, Mark V. Williams would understand that by utilizing information and long-lasting trends investors can rationalize their judgements for better outcomes.