Question

What can behavioural finance teach us about finance ?

i need unique answer please

Answer 1

Behavioral finance is related to decision making process based on human psychology. It teaches us about different kind of biases and errors which investors make while making their financial decisions. The investors are not always rational therefore they make mistakes and it is major reason of deviations from the efficient markets hypothesis which cannot be explained by any other theory. The investor’s psychology plays an important role in financial decisions and because of their approach sometime it is difficult for them to take advantage of under-priced securities. Sometime investors get trapped in to some misinformation and not able to analyze the situation. The behavior of investors is different in different market conditions.

There are three types of biases related to behavioral finance -

• Self-attribution bias is related to individual’s tendency to overestimate their talent at the time of success and at the time of failure, they blame the other factors.
• Overconfidence is related to overestimation of their abilities to predict or time the market
• Hindsight bias is the tendency of individuals where they think that they have performed better than actually they do or they have predicted it before it actually happened. This process hinders their abilities of future learning.