What is Behavioral Finance?
Behavioral Finance is a field of finance that proposes psychology-based theories to explain stock market anomalies. Conventional financial theory considers the world and its participants are in most cases rational and in the world of finance focus on maximizing wealth. However, there are many occasions where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways.
Behavioral finance seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions Dr. Daniel Kahneman and Dr. Amos Tversky are psychologists and considered to be the fathers of behavioral finance. Economist Richard Thaler also made significant contributions. In 2002, Kahneman received the Nobel Memorial Prize in Economic Sciences for his contributions to the study of rationality in economics. Behavioral finance is very different from other areas of finance. If you encounter difficulties with writing a research paper on behavioral finance or need help with finance homework, our finance homework service is just what you need.
Behavioral Finance Examples
A number of irrational behaviors and characteristics have been identified in those working in the world of finance that could explain some anomalies in the market that conventional finance does not. Here are a few behavioral finance examples:
- Gambler’s fallacy: Refers to an incorrect interpretation of statistics where someone holds the belief that the occurrence of a random independent event would somehow cause another random independent event to be less likely to happen. An example would be flipping a coin 20 times and having it come up heads each time. Gamblers fallacy would have you believe the next toss has a better chance of being tails which is false.
- Herd behavior: The preference for individuals to mimic the behaviors or actions of a larger sized group. The reason for this are social pressure to conform and the common rationale that a large group could not all be wrong.
Anchoring is the tendency for people to attach or “anchor” their thoughts around a reference point even though it doesn’t have any logical relevance to the current decision. These are just a few of the behavioral finance examples that have been identified as characteristics some brokers in the market display. If you are confused by some aspects of behavioral finance don’t worry. The finance homework service we offer can help.
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