{"id":44039,"date":"2023-01-15T22:30:00","date_gmt":"2023-01-15T22:30:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=44039"},"modified":"2023-02-07T14:48:57","modified_gmt":"2023-02-07T14:48:57","slug":"behavioral-finance","status":"publish","type":"post","link":"https:\/\/businessyield.com\/business-coaching\/behavioral-finance\/","title":{"rendered":"BEHAVIORAL FINANCE: Meaning, Examples & Guide","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n

You will learn more about behavioral finance in this post, including its biases, examples, and importance. Let’s clarify these two terms, behavioral and finance, before moving on.<\/p>\n\n\n\n

Overview<\/span><\/h2>\n\n\n\n

Behavioral, also known as behavior, is an act by which a person, animal, plant, or chemical reacts toward something or people in a particular situation.<\/p>\n\n\n\n

Finance, is a fund, money available to a person or organization or a country to run a business, activity, or project. Or the management of the money and the financial economy as a whole in the USA or the world as large.<\/p>\n\n\n\n

What Is Behavioral Finance?<\/span><\/h2>\n\n\n\n

Behavioral finance is also known as the psychology of investing. It is the study of psychological effects on investors or individuals and the financial economy or markets as a whole.<\/p>\n\n\n\n

Behavioral finance is a study that explains the effects of psychological theories based on investors and their rational decisions, market outcomes, and anomalies. It explains in the real world how financial decisions made by decision-makers might not be rational every time and can cause unpredictable consequences. It also allows the investors to know that they have limits on their emotions, assumptions, and perceptions.<\/p>\n\n\n\n

How Behavioral Finance Was Developed<\/span><\/h2>\n\n\n\n

Behavioral finance was derived from the subfield of behavioral economics, which is also a subfield of traditional economics; that is, the coming together of economics, finance, and psychology to form behavioral economics.<\/p>\n\n\n\n

The people who started behavioral finance in the 1980s were Amos Tversky and Daniel Kahneman, who were finance theorists and developed the behavioral finance theory together with Richard Thaler, Hersh Shefrin, Werner De Bondt, Robert J. Shiller, and Dan Ariely. They apply prospect theory to financial markets<\/a> in different years.<\/p>\n\n\n\n

Behavioral Finance Biases<\/span><\/h2>\n\n\n\n

These behavioral finance biases are also examples of behavioral finance. They are the effects that affect the financial economy and individuals psychologically in the way they make their decisions. Knowing the biases of behavioral finance helps us to know how we spend our money and invest, how to overcome them, and how to make better financial decisions. Here is the basic concept of biases below with some other biases.<\/p>\n\n\n\n

Read also: Finacial Management<\/a><\/span><\/h5>\n\n\n\n

#1. Loss Aversion<\/span><\/h3>\n\n\n\n

It is a bias whereby investors avoid losses rather than gains. People think and are more sensitive to losing than gaining, and they make decisions concerning the loss, either by forgetting or by making fewer decisions for the gain. This is why some people save rather than invest; they have a fear of taking small risks.<\/p>\n\n\n\n

The best way to tackle this bias is to take some risks with assets that typically perform well and create an investment strategy<\/a>, especially a diversified portfolio of standard stock markets.<\/p>\n\n\n\n

#2. Overconfidence Bias<\/span><\/h3>\n\n\n\n

It is when some investors see that they have overconfidence that they overestimate their abilities and knowledge, which can lead to rash and poor decisions.<\/p>\n\n\n\n

To tackle this bias is to get an investing pattern, and stick to passive investing, no one is above learning, so you can learn from others, and if you are a new investor, consult a good professional.\u00a0<\/p>\n\n\n\n

#3. Anchoring Bias<\/span><\/h3>\n\n\n\n

This is where investors listen to one decision and value it while ignoring the other decisions. It can influence decision-making and make investors not look into other decisions. It is based on their spending level.<\/p>\n\n\n\n

To overcome this bias is to look at decisions very carefully, especially alternative ones. And do research on any decision taken to see if it is a good choice.<\/p>\n\n\n\n

#4. Herd Behavioral Bias<\/span><\/h3>\n\n\n\n

With this bias, individuals or investors can\u2019t make decisions or have the fear of making their decisions based on their financial data. As the saying goes, \u201cfollow and do what others are doing<\/strong>\u201d. Investors follow their colleagues because it feels safer, but it can backfire and lead to a setback in your investments.<\/p>\n\n\n\n

To stop this bias, you need to be able to make rational decisions that will help your financial situation. You can follow other investors if the investment is good, but you should have your own plans behind you in case of any setbacks.<\/p>\n\n\n\n

#5. Mental Accounting<\/span><\/h3>\n\n\n\n

It is a bias that does with individuals or investors have on what they use their money to do. This means the money in their possession has numerous uses, like; fun money, expensive or luxurious things money, if the money is a \u201cgift\u201d to them. But if they earn it, they will save it. It can lead to not completing your budget.<\/p>\n\n\n\n

This bias has solutions if you can make a budget of the expenditure and income finances on how you spend and save some of the income for future purposes.<\/p>\n\n\n\n

Some Other Behavioral Finance Biases<\/span><\/h3>\n\n\n\n

There are other biases that affect individuals such as:<\/p>\n\n\n\n

#1. Emotional bias<\/span><\/h4>\n\n\n\n

Individuals can have this bias due to their emotions. That is, the way they feel and think(fear, anger, being under pressure).<\/p>\n\n\n\n

#2. Confirmation Bias <\/span><\/h4>\n\n\n\n

This is when individuals fail to follow through on their investment or business to see if it was successful. When given information on investment, investors just assume that the information is correct even though is not.<\/p>\n\n\n\n

#3. Familiarity Bias<\/span><\/h4>\n\n\n\n

This is when individuals invest in one particular thing or a familiar thing and fail to invest in multiple investments that reduce risks to the investors.<\/p>\n\n\n\n

#4. Hindsight Bias<\/span><\/h4>\n\n\n\n

This is when investors have foreseen what will happen with their investment in the future and do not have plans or decisions to make if the investment crashes in the future, thereby leading to hindsight bias.<\/p>\n\n\n\n

#5. Illusion of Control<\/span><\/h4>\n\n\n\n

In this bias, individuals or investors think they can manipulate business or investment outcomes, whether they can or not. And more (e.t.c).<\/p>\n\n\n\n

Behavioral Finance Examples<\/span><\/h2>\n\n\n\n