Below is an introduction to the finance segment, with a conversation on a few of the theories behind making financial decisions.
When it comes to making financial decisions, there are a group of theories in financial psychology that have been established by behavioural economists and can applied to real life investing and financial activities. Prospect theory is a particularly well-known premise that describes that individuals do not always make logical financial decisions. In a lot of cases, rather than looking at the general financial result of a circumstance, they will focus more on whether they are acquiring or losing money, compared to their beginning point. Among the essences in this theory is loss aversion, which causes individuals to fear losses more than they value equivalent gains. This can lead financiers to make poor choices, such as holding onto a losing stock due to the mental detriment that comes with experiencing the loss. People also act differently when they are winning or losing, for instance by playing it safe when they are ahead but are prepared to take more chances to prevent losing more.
In finance psychology theory, there has been a substantial amount of research and evaluation into the behaviours that influence our financial practices. One of the leading ideas forming our financial choices lies in behavioural finance biases. A leading idea surrounding this is overconfidence bias, which discusses the psychological process whereby individuals think they know more than they actually do. In the financial sector, this implies that investors might believe that they can predict the marketplace or pick the best stocks, even when they do not have the appropriate experience or understanding. As a result, they may not benefit from financial recommendations or take too many risks. Overconfident investors often think that their past achievements were due to their own skill rather than chance, and this can cause unforeseeable outcomes. In the financial industry, the hedge fund with a stake in SoftBank, for instance, would identify the value of rationality in making financial choices. Similarly, the investment company that owns BIP Capital Partners would agree that the psychology behind finance assists individuals make better decisions.
Amongst theories of behavioural finance, mental accounting is an essential concept established by financial economic experts and describes the manner in which people value money differently depending on where it originates from or how they are preparing to use it. Rather than seeing money objectively and similarly, people tend to split it into psychological categories and will unconsciously assess their financial deal. While this can cause unfavourable decisions, as people might be handling capital based on emotions website instead of logic, it can result in better money management in some cases, as it makes individuals more knowledgeable about their financial commitments. The financial investment fund with stakes in oneZero would concur that behavioural theories in finance can lead to better judgement.