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Behavioral Finance
Behavioral Finance
Behavioral finance seeks an understanding of the impact of personal biases on investors. Here is
a list of common financial biases.
Common biases include:
1.Overconfidence and illusion of control
2.Self Attribution Bias
3.Hindsight Bias
4.Confirmation Bias
5.The Narrative Fallacy
6.Representative Bias
7.Framing Bias
8.Anchoring Bias
9.Loss Aversion
10.Herding Mentality
OVERCOMING BEHAVIORAL
FINANCE ISSUES
RELYING ON REFLEXIVE DECISION-MAKING MAKES US MORE PRONE TO DECEPTIVE BIASES AND EMOTIONAL
AND SOCIAL INFLUENCES.
ESTABLISHING LOGICAL DECISION-MAKING PROCESSES CAN HELP PROTECT YOU FROM SUCH ERRORS.
GET YOURSELF FOCUSED ON THE PROCESS RATHER THAN THE OUTCOME. IF YOU’RE ADVISING OTHERS, TRY
TO ENCOURAGE THE PEOPLE YOU’RE ADVISING TO THINK ABOUT THE PROCESS RATHER THAN JUST THE
POSSIBLE OUTCOMES. FOCUSING ON THE PROCESS WILL LEAD TO BETTER DECISIONS BECAUSE THE
PROCESS HELPS YOU ENGAGE IN REFLECTIVE DECISION-MAKING.
#2 PREPARE, PLAN
AND PRE-COMMIT
BEHAVIORAL FINANCE TEACHES US TO INVEST BY PREPARING, BY PLANNING, AND BY MAKING SURE WE PRE-COMMIT. LET’S FINISH WITH A
QUOTE FROM WARREN BUFFETT.
“INVESTING SUCCESS DOESN’T CORRELATE WITH IQ AFTER YOU’RE ABOVE A SCORE OF 25. ONCE YOU HAVE ORDINARY INTELLIGENCE,
THEN WHAT YOU NEED IS THE TEMPERAMENT TO CONTROL URGES THAT GET OTHERS INTO TROUBLE.”