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Behavioural Finance - Why we don't always manage money rationally

Our human decision-making process is influenced by many factors - including psychological factors and heuristics that occasionally lead us to irrational choices. Behavioural science describes how our decisions and actions are influenced by cognitive processes. This phenomenon also exists in investing, also known as "behavioural finance".


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What is Behavioural Finance?

Behavioural finance deals with the unconscious behavioural tendencies of investors on the financial market. Researchers distinguish between two thought patterns - a subconscious and a conscious system. The subconscious system is fast, instinctive and emotional (heuristic), while the conscious system is slower, more analytical and rational. We should make our financial decisions consciously, but the subconscious often plays along. As a result, we sometimes make bad decisions without realising it.


Biases and heuristics in day-to-day finance

To better see through and avoid irrational decisions, we should know and understand the underlying behavioural tendencies. Here are some of the most common behavioural tendencies you can look out for:


Over-optimism

We tend to overestimate our skills and knowledge in terms of investing and focus too much on positive events while ignoring negative factors.


Loss aversion

The hurt of suffering a loss is usually stronger than the pleasure of making a win. That is why we tend to avoid risky investment decisions.


Herd behaviour

We tend to follow the opinions and behaviour of others instead of making our own decisions independently.


Availability heuristic

We fall back on the information that is most readily available to us and may ignore important facts or data. ChatGPT says hi😊


By consciously addressing these behaviours, we can break free from them and make better choices. One way to do this is to seek information and advice from independent experts and consider different perspectives.


This article is for informational / promotional purposes.

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