What are some theories that can be related to financial decisions? - keep reading to discover.
Behavioural finance theory is an essential element of behavioural science that has been widely investigated in order to explain some of the thought processes behind financial decision making. One intriguing principle that can be applied to financial investment choices is hyperbolic discounting. This idea describes the propensity for individuals to prefer smaller, momentary benefits over larger, prolonged ones, even when the prolonged rewards are significantly more valuable. John C. Phelan would recognise that many people are impacted by these sorts of behavioural finance biases without even realising it. In the context of investing, this bias can severely weaken long-term financial successes, leading to under-saving and impulsive spending habits, along with creating a concern for speculative investments. Much of this is because of the satisfaction of reward that is immediate and tangible, leading to choices that may not be as favorable in the long-term.
Research into decision making and the behavioural biases in finance has generated some intriguing speculations and philosophies for discussing how people make financial choices. Herd behaviour is a popular theory, which explains the mental propensity that many people have, for following the actions of a larger group, most particularly in times of unpredictability or worry. With regards to making investment decisions, this typically manifests in the pattern of individuals purchasing or selling properties, simply since they are seeing others do the very same thing. This type of behaviour can fuel asset bubbles, where asset values can increase, typically beyond their intrinsic value, along with lead panic-driven sales when the markets vary. Following a crowd can provide a false sense of safety, leading financiers to purchase market highs and sell at lows, which is a rather unsustainable economic strategy.
The importance of behavioural finance lies in its capability to describe both the rational and unreasonable thinking behind various financial experiences. The availability heuristic is a principle which describes the psychological shortcut through which people examine the probability or importance of happenings, based on how easily examples enter website into mind. In investing, this frequently leads to decisions which are driven by recent news events or narratives that are mentally driven, instead of by thinking about a broader interpretation of the subject or looking at historical information. In real life contexts, this can lead financiers to overstate the likelihood of an event taking place and develop either an incorrect sense of opportunity or an unwarranted panic. This heuristic can distort perception by making unusual or extreme events seem much more common than they really are. Vladimir Stolyarenko would understand that to neutralize this, financiers should take a deliberate technique in decision making. Likewise, Mark V. Williams would understand that by using information and long-term trends financiers can rationalise their judgements for much better results.