Question

Subject : Behavioral Finance

What are the examples of behavioral anomalies that you encounter personally in your daily life?

Could you give me the examples and why in details?

Thank you in advance

Answer 1

I will explain the behavioral anomalies in a story boarding fashion

1) Let's say I am taking an exam, I will put in minimal effort to save my self esteem, so that later when the results come out, I can tell people that I barely studied. This behavioral anomaly is called Self Handicapping. People create difficult obstacles in their own path thus making it harder for themselves to manage future explanations for why they succeed or failed.

2) Anchoring: The process of planting a seed of thought in someone's head, which will eventually influence their actions. For example, if we only discuss the drawbacks of Equity investments, then as an investor, you will have a very negative bias against equity investing

3) Hot hand fallacy: A person who gets successs with a random event, will keep on getting success in those future investments. For example, I as an investor, tend to avoid a company which has rallied 50% in a month, because of the hot hand fallacy

4) Gambler’s Conceit : The belief that someone can stop a risky action, while still engaging in it. For example, when I gamble, I tend to say that I will get up when i end up winning, but the anomaly here is that there is no surety about me winning the game

5) Rationalized Cheating : When an individual rationalizes a negative action, so as to feel that they are not in the wrong side of things. For example - I tend to say that having 2 cheat days in a week, is okay for my diet because I read it on some article on the internet. This is no way to rationalize a negative behavior