Behavioural Finance
A key element of Behavioural Finance is cognitive bias,
and the psychological influences that underpin it.
What is Behavioural Finance?
Behavioural Finance explores how psychological biases like cognitive bias, herding bias, confirmation bias, and anchoring bias affect investor decision-making. These biases often lead to poor investment choices and can significantly impact portfolio performance.
Understanding and mitigating these financial biases enables investors to make more rational and informed decisions, improving their overall strategy. Explore our resources to gain insights into investment psychology.
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Download our Behavioural Finance infographic
Behavioural Finance is an area of study that combines psychology,
sociology with economics and finance.
This explains systemic biases that are exhibited by financial markets and investors. It asserts that people often behave irrationally based on emotion and cognitive biases.
Biases can lead to poor financial outcomes
A great example is the U.S stock market crash of 1929. During the late 1920’s a bull market led the American public to become increasingly optimistic that increasing stock prices would continue to rise. A vast sway of the public got caught up in the hype which eventually led to a major economic crash. A great example of Herding Bias.
This is an extreme example, but clearly demonstrates the effect and outcomes of cognitive bias. Through understanding Behavioural Finance, investors are able to understand the psychological influences on their decision making, and potentially avoid costly financial mistakes.
Here are some of the most common behavioural biases
Confirmation Bias Infographic
Confirmation bias is when individuals have an unconscious tendency to look for information that supports their pre-existing beliefs.
Herding Bias Infographic
Herding bias occurs when individuals make decisions based on the actions of others, rather than their independent analysis or research.
Recency Bias Infographic
Recency bias, (also known as availability bias), is when
people give increased weight to more recent events, often ignoring information gathered over a longer time period.
Anchoring Bias Infographic
Anchoring bias is relying heavily on an initial piece of information, the anchor. Subsequent decisions have a bias towards interpreting new information around the anchor.