Articles
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The Psychology Behind Common Investor Mistakes
Behavioral finance, a relatively new area of financial research, has been receiving more and more attention from both individual and institutional investors. Behavioral finance combines results from psychological studies of decision-making with the more conventional decision-making models of standard finance theory.
By combining psychology and finance, researchers hope to better explain certain features of securities markets and investor behavior that appear irrational. Standard finance models assume that investors are unbiased and quite well informed. Investors are assumed to behave like Mr. Spock from Star Trek, taking in information, calculating probabilities and making the logically “correct” decision, given their preferences for risk and return. Behavioral finance introduces the possibility of less-than-perfectly-rational behavior caused by common psychological traits and mental mistakes.
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