Sentimental Finance

#authorabhisheksharma

"I would go with Public Provident Fund and Fixed Deposits like my Dad....."

"Invest in Equity bro... I have seen it grow like anything...."

"Nah! Stock Market is not my thing at all....."

I am sure you must have heard if not all but similar comments talking to your peers, friends, colleagues, relatives etc. They all have their opinions and experiences about finance and the Finance management, spending and investment behaviour they show are guided by behavioural patterns and sentiments. Sentiments? Where is a place for emotions in a something objective and logical field like Finance? Finance as we know is all about numbers isn't it, I mean the whole field is based on data, maths, logical derivations/interpretations, where or how or why would sentiments would even effect Finance or Financials decisions. Emotions are building blocks human psychology and probably the only thing that has kept AI secondary to humans till now, so, you can not ignore emotions making up the behaviour of a person even when we talk about Finance.

Behavioural finance is a field of study that combines psychology and economics to explain why and how investors act and to analyze how that behaviour affects the market. It seeks to explain the reasons behind inefficient market outcomes.

The understanding of Behavioural Finance is though not limited to but chiefly includes the following:

1. Heuristics: Heuristics are mental shortcuts or “rules of thumb” that investors use to make decisions. These shortcuts may lead to biases in the decision-making process.

2. Overconfidence: Overconfidence bias is the tendency for an investor to overestimate their ability to predict the movements of the market.

3. Confirmation Bias: This is the tendency to seek out information that supports one’s existing beliefs or decisions.

4. Loss Aversion: Investors are often more sensitive to losses than to gains of the same size, a phenomenon known as loss aversion.

Behavioural finance suggests that the structure of the market and the irrational behaviour of its participants may influence the direction of the market. This can lead to anomalies in market outcomes, such as price fluctuations and bubbles.

Understanding behavioural finance can provide investors with insights into their own behaviour and the behaviour of others. This can help them make more informed investment decisions and avoid some of the common biases that can lead to poor investment outcomes.

Remember, investing is not just about numbers and financial theories. It’s also about understanding human behaviour and the way it can influence the financial markets.

? www.abhishek-sharma.co.in

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