Markets do go up and down. However, crashes and bubbles shouldn’t happen if people made rational decisions and markets were efficient.
These events cannot be explained by modern economics alone, something else must be at work for events to occur. This is why a new theory was needed and thus the concept of investor psychology and Behavioural Finance was born.
There are many ways to describe what Behavioural Finance is all about, the cross-breed of psychology and economics, marrying the field of investments with biology and psychology or simply putting a human face on investing. No matter what label we attach to it, Behavioural Finance is the bridge between the “ideal” world of modern economics and finance or “neoclassical economics” and the real world, where we find ourselves working and investing in today.
“Modern economic theory is very powerful, making specific predictions from a small number of technical assumptions but it can be mystified and come undone by the ordinary behaviour of ordinary people!”
Heuristic techniques, biases and context can explain how and why we make poor decisions with our finances.
It asks what would happen if humans were able to leave their emotions behind when making financial decisions.
People are inclined to often trade or invest with preconceived ideas that can result in decisions based on emotion.
Answer a few simple quiz questions that could help highlight inherent biases you may not be aware of.
Below are some “simple” quiz questions that could help highlight the biases you may not be aware of.