Cultural Influences on Financial Decisions
February 12, 2025
For centuries, men have held the ambition to be able to beat the market consistently. Year after year many traders try new strategies to be able to win consistently in the market. However, their strategies predictably fail creating the belief that the market is invincible and that the ability to beat the market consistently is […]
The Indian equity markets are at an all-time high. This can be largely attributed to the large inflow of savings which is being channelized from the economy to the stock market. A lot of these savings are regularly routed via the mutual fund route. The Indian market is still developing. Hence, a lot of money […]
The retail industry has become closely intertwined with the finance industry over the years. This is the reason that the availability of better financing options often causes the sales of one store to increase in comparison to other stores. Over the years, retail stores have come up with many financial innovations which has helped them […]
Ever since the beginning of history, humans have been using commodities. This has created a necessity to trade commodities. However, as financial markets advances, trading commodities became a business unto itself. The modern world provides a plethora of options when it comes to commodities investing. Commercial users of the products can use these financial markets […]
The exchange rate between two currencies is determined by the interaction of several variables. Some variables have more influence on the determination of currency rates than the others. One such variable is the interest rate. In general, changes in the interest rate create huge fluctuations in the value of all currencies. In fact all major […]
Investors who have been in the market for a long time know that investing is an emotional activity as much as it is a financial activity. This is the reason that people who have a higher degree of self-control generally tend to do better than their peers. Self-control bias may seem like an obvious and simple flaw. However, it has a profound effect on the behavior of any investor. The details of the self-control bias have been listed below:
Self-control bias stems from a behavioral flaw called hyperbolic discounting. As per hyperbolic discounting, there is an inherent flaw in the way investors perceive gains. They have a large appetite for short term gains. However, if they are asked to sacrifice short term gains for long term gains which will be much bigger, most will still choose the short term gains. Hence, investors have a skewed time preference, which negatively impacts their decision making. In simple words, investors with this bias are inclined towards spending more today at the expense of saving less for the future.
Self-control bias is not only seen in the financial world. It is also seen in the other walks of our daily life. For instance, people may be unable to lose weight despite knowing that it is in their best long term interest to do so. They may continuously choose to eat unhealthy food despite knowing that it will cause harm to them.
The bottom line is that self-control bias is not small or frivolous. Like other behavioral biases, this bias also has a huge impact on the portfolio of the investor as well as the return that they gain from it.
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