Financial Analysis. Lesson 25. Behavioral Finance Biases and Investment Decision-Making
Financial Analysis. Lesson 25. Behavioral Finance Biases and Investment Decision-Making
Behavioral finance biases affect rational decision-making in financial contexts.
Anchoring bias causes over-reliance on initial information when valuing assets.
Overconfidence bias leads investors to underestimate potential risks in decisions.
Loss aversion describes the stronger emotional impact of losses over gains.
Confirmation bias drives investors to seek information confirming existing beliefs.
Herding behavior involves following crowd trends, regardless of underlying logic.
Mental accounting separates money into categories, influencing spending habits.
Disposition effect prompts investors to sell winning assets too early.
Endowment effect overvalues owned assets compared to identical unowned assets.
Regret aversion avoids actions that might lead to future regret.
Status quo bias prefers maintaining current investments over making changes.
Prospect theory explains why people view gains and losses differently.
Availability bias relies on recent examples, impacting investment decisions.
Recency bias overemphasizes recent information over long-term historical data.
Self-attribution bias credits success to skill and failures to external factors.
Optimism bias leads to unrealistic expectations about positive investment outcomes.
Framing effect changes decisions based on presentation of information.
Cognitive dissonance creates discomfort when new facts contradict existing beliefs.
Narrative fallacy relies on compelling stories rather than statistical facts.
Hindsight bias assumes past events were predictable after they occurred.
Technical Examples:
Anchoring bias impacts stock valuations based on initial price information.
Disposition effect encourages premature selling of profitable investments.
Framing effect alters risk perception based on presentation style.