The Idea of Behavioural Finance
As a student of finance, I had seen some interesting days on the stock markets, and some interesting debates about it in college. There were times when an impressive stock took a beating despite performing well. Then there are those penny stock bubbles that come up often that just beats us on how they find investors to pump in the money.
This threw a few interesting questions, and they often caught my fascination. Why do some stocks get beaten even when results are seemingly attractive while seemingly worthless shares attract money? What drives stock prices? What drives investors’ decision making?
The field of “behavioural finance” is essentially the application of these ideas to find answers to these in finance. It deals with understanding and explaining how certain cognitive errors which we laymen call as biases influence investors in their decision- making process. The dudes who study and take this approach to crack financial problems suggest that such biases are often responsible for various irregular phenomena that appear in financial markets such as turbulence, predictable trends, seasonable cycles, “bubbles”, etc. Such irrational or quasi (nearly) rational behaviour is what forms the backbone of the field now known as behavioural finance.
Behavioural finance seeks to find out the reasons behind such behaviour on part of the trading agents that’s you and me and also to know how as an investor one can make use of such irrationality on others part to increase our returns on investment. I thought I should say all this as part of the first post on this blog, which is essentially created to be a community for exchanging thoughts on behavioural (or behavioral on the other side of the Atlantic) finance.
Theories of behavioural finance such as prospect theory, overconfidence, anchoring, framing, etc., can help explain the phenomena of manias and panics. For example, in an environment where everyone seems to be profiting in the market, investors may refuse to take note of unfavourable information and react with overconfidence. The feel of regret and the urge to profit is akin to an epidemic and becomes self-reinforcing, resulting in a market mania. We see all this everyday and might be prey to them ourselves as well. I hope to make this a place where we discuss these things and help each other in making some money and of course share the knowledge.
As I write this post, the blog is still under construction, so if you read this before it is ready, don’t get judgmental soon.. BF says that we often have judgment bias 
.. check the about behaviouralFinance.info page for information.
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