Finance and Management (FM) - Expected Question
Answer:
Introduction:
Behavioral finance is a field that combines psychology and finance to understand how investors make decisions. Unlike traditional finance, which assumes that investors are rational, behavioral finance acknowledges that emotions, biases, and cognitive errors influence financial choices.
Key Concepts of Behavioral Finance:
- Herd Mentality: Investors follow the crowd, leading to market bubbles or crashes.
- Loss Aversion: Investors fear losses more than they value equivalent gains.
- Overconfidence Bias: Investors overestimate their knowledge and abilities, leading to risky decisions.
- Confirmation Bias: People seek information that supports their existing beliefs, ignoring contrary evidence.
- Anchoring Bias: Investors fixate on a specific number (e.g., a stock’s past high price) when making decisions.
Relevance of Behavioral Finance in Investment Decisions:
- Helps investors understand their own biases and make more rational choices.
- Assists policymakers in designing better financial regulations.
- Improves portfolio management by considering psychological factors.
- Aids companies in structuring IPO pricing and marketing strategies.
Conclusion:
Behavioral finance provides insights into why investors often make irrational decisions. Recognizing biases and applying behavioral finance principles can lead to better investment strategies and market stability.
0 टिप्पणियाँ