😎Behavioral finance👉 is a field of study that combines psychology and economics to understand how psychological, cognitive, and emotional factors influence the financial decisions of individuals and institutions, and consequently, financial markets. It challenges the assumption of the perfect rationality of economic actors, which is at the heart of classical financial theory.
The key principles of behavioral finance:
🙉Cognitive biases: These are systematic errors of thought that affect our judgment and decision-making. Examples:
👌Confirmation bias: Tendency to seek out and interpret information that confirms our pre-existing beliefs.
😳Loss aversion: The pain of a loss is felt more intensely than the pleasure of a gain of equal value.
🦄Herd effect: Tendency to follow the actions of the majority, even if they are irrational.
👌Overconfidence: Overestimation of one's own skills and ability to predict the future.
🤷Anchoring: Tendency to rely excessively on initial information received (the anchor) to make decisions.
😳Emotions: Emotions such as fear, greed, hope, and regret play a significant role in financial decisions.
🤡Heuristics: These are mental shortcuts we use to simplify complex decisions. Although useful, they can also lead to mistakes.
💻Framing: The way a problem is presented can influence the decision.
The impact of behavioral finance on the markets:
👉Behavioral finance explains certain phenomena observed in financial markets that cannot be explained by classical financial theory:
🚀Excessive volatility: Markets tend to fluctuate more than economic fundamentals would justify, due to investors' emotional reactions.
🎅Speculative bubbles and stock market crashes: Collective euphoria and panic fear can lead to irrational market movements.
👀Market anomalies: These are persistent phenomena that contradict market efficiency, such as the momentum effect (tendency of assets to continue in the direction of their recent movement).
Concrete examples:
👉Investing in cryptocurrencies: The cryptocurrency market is particularly prone to behavioral biases due to its volatility and speculative nature. Fear of missing out (FOMO) and the herd effect can lead to irrational purchases.
🥶Stock market crashes: During crashes, panic fear and loss aversion can prompt investors to sell massively, amplifying the decline in prices.
The interest of behavioral finance:
⭐For investors: Understanding behavioral biases helps you make more rational decisions and avoid psychological pitfalls.
⭐For regulators: Behavioral finance can help design policies to limit systemic risks associated with irrational market behavior.
⭐For businesses: Knowledge of behavioral biases can be used in marketing and financial communication.
IN CONCLUSION: Behavioral finance offers a valuable perspective for understanding how financial markets work and investors make decisions. By taking psychological factors into account, it allows for a more realistic and effective approach to investing.
