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Navigating intricacies of behavioural finance and its impact on investment stability - Biz Today
beliefs, while overconfidence can lead to excessive trading and overestimation of abilities.
Similarly, loss aversion, which is the fear of loss more than the urge to earn a profit, may lead
to a more conservative investment strategies.

Another theory which is closely knitted to behavioural finance is prospect theory. The idea

contradicts the conventional notion of rational decision-making, which suggests that individuals
do not evaluate alternative outcomes in isolation, but rather in terms of perceived benefits and
losses in comparison to a reference point. Such methods force investors to avert risks when

faced with potential gains and risk-seeking behaviour while confronted with potential loss. In
order to make rational investment decisions, it is significant to gain a thorough understanding of
the peculiarities of prospect theory.

In addition, behavioural finance explores the concept of framing and perception. These
represent the distinctive influence of the information’s presentation on investing decisions,

which can lead to varying choices. The framing and perception technique is often exercised by
media and news outlets, which can impact investor sentiments. Similarly, cognitive dissonance
or the discomfort associated with holding opposing views, can affect investing decisions as

people attempt to ease this psychological discomfort.

Investment decisions which are taken under the strong influence of emotions are another factor

to be considered. Experts suggest that fear and greed are twin emotions in the financial market
that can lead to impulsive and irrational decisions. For instance, if an investor lets their
emotions take over their cognitive process while making financial decisions, it may lead to

pitfalls of market panics. Understanding the emotional aspects of investing and developing
emotional intelligence can help investors make rational choices.

Even though the basic concepts of financial decision-making urge us to adhere to rational paths,
sometimes in the face of complex financial decisions individuals often resort to heuristics
techniques. While there is a chance that these shortcuts are efficient, they can also lead to

faults in judgment. The heuristic mindset pushes us to rely on readily available information,
sometimes potentially disregarding significant data. Another issue is that the representativeness
heuristic encourages us to base our decisions on stereotypes rather than on unbiased analysis

of objectives. We might get fixated on the initial reference points as a result of anchoring and
adjustment, which can alter how we perceive value.

Some of the real-world examples of the impact of considering behavioural biases while making
financial decisions are the dot-com bubble of the late 1990s and the housing bubble of the mid-
2000s. These two stock markets and real estate bubbles vividly depict the influence of investor

sentiment and overconfidence. Such irrational exuberance of investors led to the shares
exceeding in value as against conventional assessments and finally bursting all financial

bubbles.

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