Financial Analysis. Lesson 12. Behavioral Finance and Market Psychology
Financial Analysis. Lesson 12. Behavioral Finance and Market Psychology
Behavioral finance studies how psychological factors impact financial decisions.
Overconfidence bias leads investors to overestimate their knowledge or abilities.
Loss aversion describes the tendency to prefer avoiding losses over gains.
Anchoring involves relying too heavily on initial information when making decisions.
Confirmation bias causes investors to seek information supporting their beliefs.
Herd behavior occurs when individuals mimic the actions of the majority.
Mental accounting separates money into different categories, affecting spending behavior.
Endowment effect values owned assets higher than identical unowned assets.
Disposition effect is the tendency to sell winning investments too early.
Prospect theory suggests people evaluate potential gains and losses differently.
Availability heuristic relies on immediate examples for decision-making, impacting judgment.
Status quo bias prefers existing conditions over making changes to investments.
Regret aversion avoids actions that may lead to future regret.
Sunk cost fallacy involves continuing investments due to past expenditures.
Framing effect influences decisions based on how information is presented.
Self-attribution bias credits success to personal skill and blames failures externally.
Optimism bias leads investors to expect positive outcomes regardless of risks.
Recency bias favors recent information over long-term historical data.
Representativeness heuristic categorizes investments based on past performance trends.
Cognitive dissonance creates discomfort when new information contradicts existing beliefs.
Technical Examples:
Anchoring can impact pricing estimates during investment valuations.
Prospect theory helps explain risk preferences in uncertain markets.
Framing effect affects how investors perceive potential risks or gains.