Question

The Importance of Behavior Finance

Behavioral finance has grown to be an important topic in the field of finance. In this discussion, define what behavioral finance is and discuss at least one of the aspects or concepts that can be found in behavioral finance. Then, include in your discussion details on why it is important for finance professionals to understand this concept. Please elaborate within 300 words. Thanks!

Answer 1

Behavioural finance is study of of implication and influence of behaviour in decision making which is mostly related to financial decision making of individual.

It is often seen that an individual is biased with his analysis and he is having the influence of his behaviour in overall financial decision making and some of this behaviour would be irrational approach to the investing by having an impatient approach in investment.

An individual is often driven by the behaviour rather than the fundamental of a company and it is often seen that he is making a lot of losses as this behavioral biases will be leading to sticking with a bad investment for a longer period of time and getting away with a good investment in a shorter period of time so and investor makes a large amount of losses.

Investors are often driven by the psychology and behaviour in his overall financial analysis and valuation approach so they are often biased towards buying of the company and they will value the company according to their convenience so that it will suit their sentimental approach and they will not be following up with the fundamental and technical analysis.

Rational investor is just a theory based assumption and it is not applicable in the practical scenarios as investors are often driven by the lack of self control and personal bias so this behaviour aspects are often leading to making irrational decisions by various investors and they should be trying to control their emotions while they are investing and they should only be focused at making investment related decisions according to the fundamentals and technicals of the company.