What Is Behavioral Finance?

Daniel Penzing
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Investing is one of the best ways to eventually become wealthy and the best way to do that is to invest in a solid mutual fund or you can invest in a company that you believe can make you rich. Stocks and bonds used to be just the way to go for anyone interested in investing in the stock market. In fact, back in the 1980’s 90% of all trades were conducted using stocks and bonds.

But what would happen if there was an easier way to get rich, a way that didn’t require you to have full knowledge of what stocks did what? A way that didn’t even require a financial education to understand how to use properly? That’s exactly what Behavioral Finance is. It is the next step in the history of investing and is becoming more and more popular each day.

Behavioral finance is a relatively new area of finance, but it is quickly becoming an important part of basic financial education due to its role in understanding human behavior related to finance. Behavioral finance attempts to analyze the extraordinarily complex decision-making processes of investors by using psychological concepts.

The goal of behavioral finance is to prevent investors from making mistakes due to their thinking processes, which are based on emotions, not logic. When these mistakes are identified, traders, advisors and investors can more effectively structure their strategies.

Key Concepts in Behavioral Finance

_. Human beings are visual creatures. They’re geared to take in as much information as possible through their eyes. That’s why there is a high demand for visual information in advertising. There is also a high demand for visual and video content in general these days.

_. In most decisions, we tend to go with the path of least resistance. The path of least resistance applies to mental activities such as thought patterns. For example, if there is a low barrier to keeping the status quo in your life and there’s a high barrier to changing something, you’ll likely stick to the status quo, even if it’s not beneficial for you.

_. The feeling of an experience is usually more important than the actual experience. For example, you buy a car and it gives you a great feeling, so you buy another car two years later. After two years, you realize that the feeling was more important than the real experience.

_. Everything has a story. People respond to the way something is presented to them. Show people something, especially something they might not like, and they are likely to misinterpret the information. For instance, if you present two graphs to people, with the same data but with one presented in a more positive way, people will attach a positive sentiment to the data presented in a positive way and a negative sentiment to the data presented with the negative way.