Articles on Behavioral Finance

Behavioral Finance – An Introduction

As investors, we are often perplexed by the behavior of the markets. For instance, we may find a stock to...

Heuristics and their role in Finance

Traditional financial theories assume that finance is a scientific field. This means that just like in a scientific problem, a...

Advantages of Behavioral Finance

The problem with traditional financial theories is that they tend to operate in an ideal world! The underlying assumptions are...

Limitations of Behavioral Finance

The theory of behavioral finance has become exceedingly popular in the past few years. This is largely because of the...

FAQ’s About Behavioral Finance

Behavioral finance is a fairly recent phenomenon. The development of this branch of finance is not more than a few...

Prospect Theory

Prospect Theory is probably the most important piece of literature in behavioral finance. The conclusions made in prospect theory underlie...

How Loss Aversion Affects Investment Decisions

Behavioral financial analysts have conducted a significant amount of research in order to understand how investors process loss. In the...

The Sunk Cost Fallacy

In the previous article, we learned about how certain psychological factors make a huge impact on our decision-making about financial...

The Endowment Effect

The endowment effect is another important psychological barrier that helps people from realizing the full potential value of their investments....

Regret Aversion Bias

In order to be successful at investing, an investor not only needs to have mastery over their numbers, but they...

Self-Control Bias

Investors who have been in the market for a long time know that investing is an emotional activity as much...

Anchoring Bias in Behavioural Finance

The average investor may be able to keep their thinking in check and save themselves from a lot of biases....

Confirmation Bias in Behavioral Finance

The vast majority of investors fail to perform well in the stock market because of behavioral and emotional reasons. The...

Herd Mentality Bias

Human beings are social animals. For centuries, our brains have been wired to conform to the actions of the larger...

Mental Accounting

Traditional economic theory assumes that all money is fungible. The meaning of the word fungible is “interchangeable.” Hence, according to...

Recency Bias

There is a common saying in the investment markets that “In the short run, the markets are a voting machine...

Overconfidence Bias

Contrary to traditional economic theory, investors are not completely rational human beings. Instead, they are also emotional. This also means...

Conservatism Bias

In accounting and in finance, conservatism is generally considered to be a positive quality. However, studies in behavioral finance have...

Framing Bias

Traditional economic theory assumes that investors are completely rational beings. Hence, they react to information in the same way if...

Behavioral Portfolios

There is a fundamental difference in the way portfolios are viewed in traditional financial theories and the way in which...

Hindsight Bias

There are several cognitive biases that affect our ability to think clearly about financial investments. One such bias is called...

What is Illusion of Control Bias and How to Avoid it

Any stock market around the world is huge in size. It is made up of many participants who regularly buy...

Status Quo Bias

Making a choice can be an overwhelming process. This is particularly true if the person making a choice has to...

Sample Size Neglect

Stock investments are supposed to be made based on rational choices. In this module, we have so far learned that...

Optimism Bias

The gist of optimism bias is often expressed by using the popular saying “rose-tinted glasses.” In real life, it is...

Cognitive Dissonance Bias

All investors have pre-existing beliefs about the way investment markets work. These beliefs are often deep-rooted and subconscious. For example,...

Home Country Bias

The activities of most investors have historically been limited to their home country. This is largely because earlier, there were...

Availability Bias in Behavioural Investing

All of us have seen movies or have read novels wherein there are several witnesses who are describing the same...

The Bias Blind Spot

We are now aware of the fact that investment markets are not driven by mathematical decisions alone. They are heavily...

The Narrative Fallacy

In an ideal world, investors are supposed to look only at cold hard facts and analyze them while making an...

The Planning Fallacy

Investors are used to looking at projections of future events. They commonly use projections about future cash flows, future profits,...

Base Rate Fallacy

The human mind is riddled with several fallacies. When human beings make investment decisions, they are battling a wide variety...

Contrarian Investing

The rise of behavioral finance has led to several new strategies being floated in the financial world. Contrarian investing is...

Cultural Influences on Financial Decisions

The financial decisions made by an investor are actually influenced by several factors that are present in their thought process....

Behavioral Life Cycle Theory

There have been many economic theories developed in order to understand how and why human beings save and spend their...

The Barnewall Model

The traditional financial theory assumes that all investors are rational. Hence, they believe that all investors will reach the exact...

Bielard, Biel and Kaiser (BBK) Model

The main criticism of the Barnewall model was that it only classified investors into two types. This created an oversimplification....

Three Dimensional Pscychographic Model

Psychographic models have evolved over the ages. They first began with the Bernwall model, which was a one-dimensional model. It...

Categorizing Behavioral Biases

The field of behavioral finance has become fairly developed over the years. There have been many psychologists as well as...

Lessons Learned in Behavioural Finance

In the past few articles, we have studied about how behavioral finance impacts financial markets more than one might believe....

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Articles on Behavioral Finance