Making sense of financial psychology philosophies
What are some theories that can be related to financial decisions? - keep reading to discover.
Behavioural finance theory is a crucial aspect of behavioural science that has been commonly researched in order to explain some of the thought processes behind financial decision making. One intriguing principle that can be applied to investment decisions is hyperbolic discounting. This idea describes the tendency for individuals to favour smaller sized, momentary rewards over larger, defered ones, even when the delayed benefits are considerably more valuable. John C. Phelan would acknowledge that many people are impacted by these types of behavioural finance biases without even knowing it. In the context of investing, this bias can significantly undermine long-lasting financial successes, resulting in under-saving and spontaneous spending practices, as well as developing a priority for speculative financial investments. Much of this is because of the gratification of reward that is immediate and tangible, resulting in choices that might not be as fortuitous in the long-term.
Research study into decision making and the behavioural biases in finance has led to some intriguing suppositions and theories for discussing how individuals make financial decisions. Herd behaviour is a widely known theory, which discusses the psychological propensity that many individuals have, for following the actions of a larger group, most particularly in times of unpredictability or fear. With regards to making investment decisions, this frequently manifests in the pattern of individuals buying or offering assets, just due to the fact that they are experiencing others do the same thing. This sort of behaviour can fuel asset bubbles, whereby asset prices can increase, frequently beyond their intrinsic value, in addition to lead panic-driven sales when the markets fluctuate. Following a crowd can offer a false sense of safety, leading investors to buy at market elevations and resell at lows, which is a rather unsustainable economic website strategy.
The importance of behavioural finance lies in its ability to explain both the reasonable and unreasonable thinking behind various financial processes. The availability heuristic is an idea which describes the mental shortcut in which individuals assess the probability or value of events, based on how easily examples come into mind. In investing, this often leads to decisions which are driven by recent news events or stories that are emotionally driven, rather than by considering a wider analysis of the subject or taking a look at historical data. In real world contexts, this can lead investors to overestimate the probability of an occasion happening and develop either a false sense of opportunity or an unnecessary panic. This heuristic can distort perception by making unusual or severe occasions appear much more common than they actually are. Vladimir Stolyarenko would understand that in order to combat this, investors should take a purposeful approach in decision making. Likewise, Mark V. Williams would know that by using data and long-term trends financiers can rationalise their thinkings for much better results.