Theories Of Behavioural Finance

Investment is made by the investors to earn money in the form of returns. In the early years, investment was based on performance, forecasting, market timing and so on. This produced very ordinary results, which meant that investors were endowed with very ordinary futures, and little peace of mind. There was also a huge gap between available returns and actually received returns which forced them to search for the reasons. While examining the reasons for the deviations they identified that it is caused by fundamental mistakes in the decision-making process. In other words, they make irrational investment decisions. In recognizing these mistakes and means to avoid them, to transform the quality of investment decisions and results, they realized

several definitions of behavioural finance exist, there is considerable agreement between them. According to Lintner, “Behavioural finance is the study of how humans interpret and act on information to make informed investment decisions.” Olsen opines that ‘behavioural finance does not try to define ‘rational’ behaviour or label decision making as biased or faulty; it seeks to understand and predict systematic financial market implications of psychological decision processes.’ It should be noted that no unified theory of behavioural finance exists at this time. Behavioural finance is based on research of human and social recognition and emotional tolerance studies to identify and understand incoming economic decisions. Behaviour finance examines recognition and emotional factors influence on the market changes and concentrates on the limited human rationality, explains the psychology effect on the financial activities and argues that financial phenomena can be better explained due to the fact that financial market participants are not rational and their decisions are

Since the late 1960s only rational financial and invetment decisions makinhh has been the mainstream of capital market. The classical or standard finance researchers opines that individuals make logical financial and investment choices. But behavioral financial researchers said that this decision making is affected by various behavioral and psyuchological phenomenon like heuristics, feelings, cognitive limitations etc. According to classical decision theory, the standard finance investor makes judgments within a clearly defined set of circumstances, knows all possible alternatives and consequences, and selects the optimum solution. The discipline of standard finance has advanced and flourished on four basic premises in terms of rational