What is behavioral finance?
Posted: Tue Jan 07, 2025 9:48 am
Trading is generally perceived and taught as a purely technical discipline, a study of precise and reliable data. One would become a good trader by following economic rules that have proven themselves for years in the field of finance. However, new research highlights the opposite: traders usually fail because of psychological biases. Other data than thinking and numbers come into play when it comes to succeeding in a volatile market. Indeed, emotional behaviors are linked to finances and these play a more than important role in the success of a career.
Behavioral south korea phone data finance is a field of study that focuses on the psychological and emotional aspects of traders . They have a real and proven impact on traders' decision-making. In the following article, we explain what behavioral finance is and what it can bring you if you apply it in your trading practice.
Traditionally, in finance, it is considered that investors act rationally and that the markets in which they buy shares are efficient. However, this initial assumption is incorrect and behavioral finance proves it.
Behavioral finance takes into account the psychology of the trader . It highlights that this has a strong influence on the decisions made by traders. It starts from the observation that an investor frequently has irrational and impulsive behaviors and admits that financial markets can be inefficient.
By choosing to follow a master's degree in trading , you will benefit from modules on this research. Essential to your success as a financial investment professional, they will show you how knowledge of your psychological and emotional behaviors are potentially obstacles. The teaching will also show you the methods to have the most appropriate behaviors in finance.
All irrational and hasty decisions can be explained in the world of financial investment. You can master these common impulses in trading by mastering three main concepts:
Prospect theory: It was developed by Daniel Kahneman and Amos Tversky and is one of the foundations of behavioral finance. Through experiments, they prove that individuals have more aversion to financial loss than preferences for gain.
The Adaptive Markets Hypothesis: This study was presented by Andrew Lo. It challenges the idea that markets are absolutely efficient and that investors always behave rationally. Indeed, he argues that traders' behaviors must always adapt to the market and its sometimes irrational nature.
The theory of investor behavior: investors act more by mimicry than in relation to market efficiency.
These concepts provide explanations for the irrational decision-making of financial investors. Faced with unstable markets, investors are not naturally able to make thoughtful and fully informed choices. Overcome by their feelings, they make mistakes, take risks or do not follow through on their approach out of fear.
The Psychology of the Trader: Mapping Behavioral Finance
Behavioral finance maps the investor's psychology to identify emotions that are incompatible with true trading success . It thus offers the possibility of mitigating them and increasing performance.
The three major emotions that obstruct rational judgment and encourage rash and uncontrolled decisions are fear, enthusiasm, and greed.
Fear is driven by three reasons:
Fear of missing out. At first glance, any action seems promising, even exceptional. However, rushing to commit sums to a volatile market rarely pays off. However, fear will be a frenzied driving force for many traders to avoid missing out on a deal.
Fear of losing money. When realizing that an investment is in deficit at a given time, the trader will tend to invest in additional shares and ultimately lose a lot.
Fear of losing profits. When the price falls, the investor withdraws his money earlier than expected for fear of losing everything, while the fluctuation was anticipated. Accepting loss in trading is an essential skill, especially if you venture into a volatile market. However, it remains extremely difficult to acquire.
Enthusiasm and greed are feelings that result from past success. Traders become overconfident and no longer respect the limits they had set for themselves.
If traders become aware of these cognitive biases by learning about behavioral finance, they can put strategies in place to circumvent these emotional and psychological difficulties.
Behavioral south korea phone data finance is a field of study that focuses on the psychological and emotional aspects of traders . They have a real and proven impact on traders' decision-making. In the following article, we explain what behavioral finance is and what it can bring you if you apply it in your trading practice.
Traditionally, in finance, it is considered that investors act rationally and that the markets in which they buy shares are efficient. However, this initial assumption is incorrect and behavioral finance proves it.
Behavioral finance takes into account the psychology of the trader . It highlights that this has a strong influence on the decisions made by traders. It starts from the observation that an investor frequently has irrational and impulsive behaviors and admits that financial markets can be inefficient.
By choosing to follow a master's degree in trading , you will benefit from modules on this research. Essential to your success as a financial investment professional, they will show you how knowledge of your psychological and emotional behaviors are potentially obstacles. The teaching will also show you the methods to have the most appropriate behaviors in finance.
All irrational and hasty decisions can be explained in the world of financial investment. You can master these common impulses in trading by mastering three main concepts:
Prospect theory: It was developed by Daniel Kahneman and Amos Tversky and is one of the foundations of behavioral finance. Through experiments, they prove that individuals have more aversion to financial loss than preferences for gain.
The Adaptive Markets Hypothesis: This study was presented by Andrew Lo. It challenges the idea that markets are absolutely efficient and that investors always behave rationally. Indeed, he argues that traders' behaviors must always adapt to the market and its sometimes irrational nature.
The theory of investor behavior: investors act more by mimicry than in relation to market efficiency.
These concepts provide explanations for the irrational decision-making of financial investors. Faced with unstable markets, investors are not naturally able to make thoughtful and fully informed choices. Overcome by their feelings, they make mistakes, take risks or do not follow through on their approach out of fear.
The Psychology of the Trader: Mapping Behavioral Finance
Behavioral finance maps the investor's psychology to identify emotions that are incompatible with true trading success . It thus offers the possibility of mitigating them and increasing performance.
The three major emotions that obstruct rational judgment and encourage rash and uncontrolled decisions are fear, enthusiasm, and greed.
Fear is driven by three reasons:
Fear of missing out. At first glance, any action seems promising, even exceptional. However, rushing to commit sums to a volatile market rarely pays off. However, fear will be a frenzied driving force for many traders to avoid missing out on a deal.
Fear of losing money. When realizing that an investment is in deficit at a given time, the trader will tend to invest in additional shares and ultimately lose a lot.
Fear of losing profits. When the price falls, the investor withdraws his money earlier than expected for fear of losing everything, while the fluctuation was anticipated. Accepting loss in trading is an essential skill, especially if you venture into a volatile market. However, it remains extremely difficult to acquire.
Enthusiasm and greed are feelings that result from past success. Traders become overconfident and no longer respect the limits they had set for themselves.
If traders become aware of these cognitive biases by learning about behavioral finance, they can put strategies in place to circumvent these emotional and psychological difficulties.