By Stephen Wendel
Behavioural finance is an interdisciplinary field that studies of how people make financial decisions in the real world. One of the core focuses of behavioural finance is to identify the shortcuts (heuristics) an ..
Behavioural researchers then look for practical, empirically tested techniques to overcome these obstacles, where possible. The field is simply fascinating and helps us both understand – and improve – our financial behaviour.
Our biases and their impact
Over the past three decades, researchers in economics and psychology have catalogued dozens of different biases that affect how investors make choices and cause them to deviate from their ideal economic outcome.
This work has challenged the common view in economics (and finance) that individuals are narrowly selfish and fully rational. In an investing context, these assumptions would have us believe that investors are all perfectly successfu ..
Psychologists Daniel Kahneman and Amos Tversky began their work on what is known as Prospect Theory in the 1970s. In a study, they found that people’s preferences for risk often depend on how options are described to them i.e. serious medical procedure with a 90 per cent survival rate elicits a very different response than one presented having a 10 per cent mortality rate.
Mathematically, they are the same, however.
Their insights, and those of other
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