One of the key aspects of behavioral finance studies is the influence of psychological biases. Discuss
One of the key aspects of behavioral finance studies is the influence of psychological biases. Discuss
Behavioral finance is the amalgamation of the areas of finance and psychology that give us an insight into the kind of relationship people have with money and how psychological factors affect the market. Every year, a variety of sectors and industries experience different outcomes.
While it may be compelling to chalking it market outcomes to the "invisible hand" devised by economist Adam Smith, psychologists, and authors like Daniel Kahneman and Dan Ariely have shown how human psychology influences financial decisions both big and small and give rise to market outcomes that may be drastically different from what classical economics would predict. Thus, a big part of the study of behavioral finance is the understanding of psychological biases that influence our decisions and guide financial markets and the economy as a whole in entirely new directions.
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