Essay On Behavioural Biases

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Behavioural Biases of Individuals/Analyst Traditional finance perspective theorist believes that individuals who have will to venture into investment activities does not allow their emotions to be guided by how investment information is presented to them. However, the same cannot be said for the behavioural finance perspective. Through psychological studies, researchers of behavioural finance have come to the understanding of how human behaviour and behavioural finance connected. This connection can create behavioural biases which can positively or negatively impact on the growth of investment opportunities. This research is on behavioural biases is categorized into two specific groups, cognitive errors and emotional biases. Cognitive Errors Cognitive errors are seen as basic statistical information processing, or memory errors that cause the decision to deviate from rationality. This may involve incorrectly updating or overlooking the prospects of investment information, which can be pertinent to growth of an investment. Additional, Cognitive errors are separated into two classifications types; Belief Perseverance and Information Processing Biases. Belief perseverance, with is relative to cognitive dissonance, is the mental discomfort that humans experience when recent information can contradict the previously held one. Information processing biases are considered as processing errors that are used irrationally in financial or investment decision making. Belief perseverance is spread across five sections; conservatism, confirmation, representation, illusion of control and hindsight. Conservatism is when individuals fail to incorporate new information as it becomes available, and continues to maintain their existing forecast. Inve... ... middle of paper ... ...s doing nothing to make positive changes to an outcome. This occurs when person are accustom to the way situations are. The endowment bias is where individuals place a greater value on an asset that they own than one that they do not own. This is, an individual may want to purchase a valuable item for less than it is being offered for, however, if they receive the purchase they will value it higher than the original asking price. The avoidance of decision making due to the fear of unfavourable decision outcomes is called regret-aversion. This consists of two types; error of commission and error of omission. Error of commission is when there is fear of taking an action whereas; error of omission is the fear from not taking an action. Here investments tend to be over conservatively made and there in more comfort in doing what the other players in the market are doing.

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