Behavioural finance, a subsection of behavioural economics, is the study of the influence of psychology on the financial behaviour of investors and financial analysts. Moreover, it includes the subsequent effect on the markets. It defines that the investors are not always rational, have limits to their self-control, and are affected by their biases. Behavioural finance may be analyzed to understand different outcomes across several sectors and industries. One of the critical facets of behavioural finance is to study the influence of psychological biases. To write a case study on behavioural finance has always been a major challenge for academic students. So, to write a case study excellently, they search for Behavioral Finance Case Study Assignment writing service.
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An overview on behavioral finance case study assignment
Behavioural finance is a section of study focusing on how psychological influences can affect market outcomes. It can be analyzed from various perspectives. Stock market returns are one of the major areas where psychological behaviours are often assumed to impact market outcomes and returns, but there are also different ways for observations. Psychological factors play a significant role in decision-making regarding investment in the security market; this is why it is important to study all these factors comprehensively to understand their impact on today’s scenario. The motive of the classification of behavioural finance is to help understand why people make specific financial choices and how those choices can influence markets.
Concept of behavioural finance
There are typically five concepts of behavioural finance:
- Mental accounting: It states people’s inclination to allocate money for specific purposes.
- Emotional gap: The emotional gap tells about decision-making based on extreme emotion and emotional strains like anger, fear, anxiety, or excitement. Emotions are a significant reason why people do not make rational choices.
- Self-attribution: It focuses on a tendency to make choices based on overconfidence in one’s skills. Within this, individuals tend to rank their skills and knowledge higher than others.
- Herd behaviour: Herd behaviour states that individuals tend to mimic the financial behaviour of the majority of the herd. Herding is considered notorious in the stock market as the reason behind dramatic rallies and sell-offs.
- Anchoring: It refers to spending consistently based on a budget level or rationalizing and satisfaction utilities.
Some of the biases in behavioural finance
Confirmation bias: It states that investors are biased towards accepting information that shows their held belief in an investment. In this bias, investors confirm that they are correct about their investment decision, even if the information is incorrect.
Loss aversion: This behavioral bias suggests that people’s perception towards profits and losses of the same quantity is not the same. It occurs when an investor tends to prioritize avoiding losses rather than making investment gains. As a result, some investors may want a higher payout to compensate for losses. It is one of the primary reasons people hold onto loss-making stocks. They have overconfidence that the stocks that are falling at a given point of time will rise in the future, and they would cover up the losses sustained by them. Thus, people’s bias towards avoiding losses is very high that it makes them suffer losses in the present in the hope that they will recover all of it in the future, which does not happen every time.
Experiential bias: It occurs when investors’ memory of the latest events leads them to believe that the event is far more likely to happen again.
Familiarity bias: It occurs when investors tend to in what they know, such as domestic owned investment or domestic companies. As a result, people are not diversified across various sectors and types of investments that can reduce risks. Investors tend to go with investments they have a history or are familiar with.
Behavioural finance in the stock market
The Efficient Market Hypothesis (EMH) is based on the belief that market investors view stock prices rationally based on all present and future intrinsic and external factors. EMH states that at any given time in a highly liquid market, stock prices are efficiently valued to reflect all the available information. When studying the stock market, behavioral finance gives a view that the market is not fully efficient. The understanding and usage of behavioural finance may be applied to stock or other trading market movements on a daily basis.