There’s this beautiful quote from Bhagavad Gita that states“For him who has conquered the mind, the mind is the best of friends; but for one who has failed to do so, his very mind will be the greatest enemy.”
The mind plays a crucial role in our existence.  It is responsible for our decision-making process, our emotions and our behaviour. It is what makes us unique individuals, but also what makes us prone to making mistakes and irrational decisions.

We all strive to make the right decision when it comes to our hard-earned money. There is a common misconception that investing is a rational process based solely on numbers and analysis. In the field of behavioural finance, emotional factors and cognitive biases play a significant role in influencing investment decisions.

Understanding these psychological factors can help investors make more informed choices and navigate the complex world of financial markets. Let’s dive deep & understand the concept of behavioural finance!

What is behavioural Finance?

The field of behavioural finance combines psychology and traditional finance theory to better understand how people make financial decisions. It recognizes that human behaviour is often influenced by emotions, biases, and cognitive limitations, unlike traditional finance, which assumes that individuals are rational and always act in their best interests.

These factors are examined in behavioural finance to explain why individuals sometimes make irrational financial decisions and how these decisions affect markets and investments.

Studies done over the past three decades indicated that economists & psychologists have catalogued dozens of different biases that affect how investors make choices & cause them to deviate from their ideal economic outcome.

Researchers discovered numerous other biases that specifically affect financial behaviour as well, such as

• Illusory superiority (most investors think they are better than average),
• Overconfidence (a belief about oneself outpacing reality)
• Recency bias (the assumption that past performance predicts future performance).

Key Concepts in Behavioural Finance

How to conquer these behavioural biases?

Understanding the principles of behavioural finance can help investors mitigate the impact of psychological biases on their decision-making. By recognising their own cognitive biases and emotions, investors can develop strategies to avoid common pitfalls and make more rational investment choices.

By acknowledging the role of emotions, cognitive biases, and social influences, investors can adopt strategies to overcome these challenges and achieve better long-term outcomes. Integrating behavioural finance principles into investment practices can lead to more informed decision-making and improved financial well-being!

Disclaimer: The above information should not be relied upon for personal or financial decisions, and you should consult an appropriate financial professional for specific advice. The information presented under our newsletter and blogs is solely for informational purpose.