How Psychology Influences Investor Behaviour | Stock Market Investing | Personal Finance скачать в хорошем качестве

How Psychology Influences Investor Behaviour | Stock Market Investing | Personal Finance

Behavioural finance is a fascinating field that combines psychology with economics to shed light on why investors frequently make irrational financial decisions. This video delves into the impact of emotional and cognitive biases on financial behaviour and decision-making, providing valuable insights into the psychological dynamics that influence markets. Exploring the world of behavioural finance: Behavioural finance questions the conventional financial theory that assumes markets are efficient and investors always make rational decisions. It suggests that psychological influences and biases can cause investors to make decisions that are irrational or harmful to their financial objectives. 1) The Influence of Psychological Biases: Understanding cognitive biases is crucial, as they can often lead to distorted perceptions, inaccurate judgements, or illogical interpretations. Some common examples are overconfidence, anchoring, and confirmation bias. Emotional Biases: Emotional responses can lead individuals to make decisions driven by their emotions rather than objective information. Emotions like fear and greed often drive individuals to make impulsive decisions, such as selling in a panic or engaging in speculative buying. 2) Important Ideas in Behavioural Finance: Daniel Kahneman and Amos Tversky developed Prospect Theory, which suggests that individuals' evaluation of gains and losses can lead to inconsistent and irrational decision-making. As an investment banker, one knows that the pain of losing money often outweighs the joy of making an equivalent gain. Understanding mental accounting is crucial, as it sheds light on how individuals sometimes make irrational budgeting or investment decisions by separating their money into different accounts based on subjective criteria. 3) Typical behavioural biases in investing: Overconfidence bias: Having an excessive belief in one's knowledge or predictive abilities can cause investors to underestimate risks and overestimate their investment capabilities. Investors frequently fixate on a particular price or value, which can hinder their decision-making when it comes to selling a declining stock or purchasing a surging one. Following the crowd can result in boom-and-bust cycles, as investors tend to flock towards popular investments and quickly withdraw when concerns arise. 4) Instances of illogical investor behaviour: Loss Aversion: Investors frequently prioritize avoiding losses over making equivalent gains, occasionally holding onto losing stocks for extended periods of time to avoid acknowledging a loss. Disposition Effect: This phenomenon involves the inclination to sell assets that have experienced gains while holding onto assets that have incurred losses. This behaviour can have negative consequences for long-term investment performance. 5) Approaches to Minimise Behavioural Biases: Education and Awareness: Learning about common biases can help investors identify these behaviors within themselves. Emphasising diversification by spreading investments across different asset classes can help mitigate the risk of making emotional decisions based on specific investments. Automated Decision-Making: Using automated investment platforms or rules-based strategies can effectively reduce the influence of emotional responses. 6) The Importance of Advisors in Managing Behavioural Biases: Objective Analysis: Financial advisors offer valuable insights to assist investors in gaining a broader perspective and overcoming personal biases. Behavioural Coaching: Advisors can assist investors in developing strategies to effectively navigate market volatility by managing their emotional responses. 7) The Future of Behavioural Finance: Increasing Recognition: As the field of behavioural finance expands, financial planning, policy-making, and investment strategy are now incorporating its principles. Technology and Behavioural Finance: The use of emerging technologies such as AI and machine learning is revolutionising the understanding and prediction of investor behaviour, leading to significant advancements in decision-making tools. Finally, behavioral finance offers valuable insights into the psychological factors that influence financial decision-making. Through a comprehensive understanding of the cognitive and emotional biases that impact investor behaviour, individuals can make more logical, unbiased, and ultimately profitable investment decisions.