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The Pros And Cons Of Behavioral Finance

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Individuals decide to invest with the main aim of maximizing their wealth, however in most cases people’s actions are not always rational and dependent on this goal only. Behavior and psychology influence people’s decisions in many ways directly and indirectly. Behavioral finance is a study that tries to combine between “behavioral and cognitive psychological theory with conventional economics and finance” to explain the reasons and the logic behind some decisions taken by investors that may seem irrational. (Investopedia) Not only this, but it also tries illustrating the effect of such decisions on the market prices, returns and resource allocation in a general method. Behavioral finance, is a study of the markets that draws on psychology, tossing all the light on why individuals purchase or offer the stocks and even why they don't purchase stocks by any means. This examination on investors behavior clarifies the different 'market inconsistencies' that challenge standard theory; It’s for the reason that this peculiarity is industrious. Thusly this behavior exists. Behavioral finance, incorporates a study that drops the traditional …show more content…

It may start explaining what people did and what they may start avoid doing but it won’t tell us what they might actually do. In the overall finance behavioral field, we may discover some findings stating that people are over confident and other ones stating that people are risk averse. These contradicting findings make people question the reliability of behavioral finance. In addition to this, it challenges some theories without giving us an alternative. Lastly “behavioral finance states that you cannot take the human element out of human decisions or institutions. But an understanding of how the human mind’s two systems work can help all of us make better investment decisions and build better investment organizations.”

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