Have you ever come across this term before? If not, here’s a basic idea for you. Behavioral finance is the field that talks about the influence of psychology-based theories to explain the anomalies that take place within the stock market. It is believed that this field can tell us the reason behind a particular individual’s investment decisions and about the market outcomes as well. By being knowledgeable in this field we can come to a conclusion on why people make irrational decisions at times.
We are all humans and although, rationally speaking, we want to accumulate maximum wealth; there are many situations in which our decisions are affected by emotion and psychological influence. So by now you should be informed about the significance of this field of study in finance. Let’s elaborate.
Why Study Behavioral Finance?
Research in this field has provided us with a lot of predictability patterns that have been replicated in many different situations. And this obviously resulted in a lot of PROFIT! A keyword in finance, I believe. Also, it has given us a better understanding about the determining factors that result in the particular behavior and performance of institutions and individuals from around the globe.
Now You Must be Thinking, Does Behavioral Finance Hold Any Prospect of Growth?
Well evidence proves that it does have enormous potential for growth. A few years back it might have not been accepted as a field on its own. But now there are a huge number of people working in it. Those in the field of finance like to believe that the stock market is like a person. Hence, it is subject to change in moods and emotions like any other person. This is where behavioral finance enters and lays a foundation for many strategies and concepts that have been evolved and hit the target.
Like any field, this too has critics. They say that, behavioral finance is not a theory and fails to prove itself when subject to a lot of methodologies. Further, they say that the anomalies shown by those in this field are mere chances or probabilities that fail to support the anomalies when the way in which they are measured changes. But there are always two sides to a coin.