Friday, 28 April 2017

Behavioural Finance

Behavioural finance looks at investor behaviour to explain 

  • why individuals make the decisions that they do, 
  • whether these decisions are rational or irrational.

It is based on the premise that individuals, due to the presence of behavioural biases:

  • do not always make "efficient" investment decisions, or 
  • do they always act "rationally" 

These behavioural biases include:
  • Loss Aversion
  • Herding
  • Overconfidence
  • Information Cascades
  • Representativeness
  • Mental Accounting
  • Conservatism
  • Narrow Framing

Whether investor behaviour can explain market anomalies is a subject open to debate.
  • If investors must be rational for the market to be efficient, then markets cannot be efficient.
  • If markets are defined as being efficient, investors cannot earn superior risk-adjusted profits consistently. 

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