Behavioural Finance

Introduction

Behavioral finance in the stock market focuses on how psychological factors and cognitive biases influence investors’ decisions, often leading to market anomalies and deviations from traditional rational models. Unlike classical finance theories that assume investors are fully rational and markets are efficient, behavioral finance recognizes that emotions, biases, and social influences play a significant role.

––––––––––––––––––––

Concept

One of the key concepts in behavioral finance is the herd effect. Based on human nature, investors often follow the crowd, buying or selling based on popular trends rather than fundamentals. This behavior can contribute to market bubbles or sudden crashes.

Closely related to trend formation is confirmation bias. Investors tend to seek out or interpret information that supports their existing beliefs while ignoring contradictory data. This reinforces prevailing trends and can ultimately lead to exaggerated price movements.

––––––––––––––––––––

Benefit

Behavioral finance helps explain phenomena such as market bubbles, crashes, and the persistent existence of anomalies like momentum trading. It highlights the importance of understanding investor psychology as a foundation for improved risk management and more effective investment strategy development.

‍