How Does Behaviour Affect An Individual’s Ability At Making Investment Decisions?

6561 words - 26 pages

"How does behaviour affect an individual's ability at making investment decisions?"AbstractThis paper provides a brief introduction into the field of behaviour finance. It then goes on to look at how different behavioural biases can have an effect on an individual decision making process. Past and influential literature in the fields of behavioural finance and psychology have been summarised and synthesised. The different behavioural biases that can affect and hinder an investor's decision making ability are looked upon and explained so that they can be avoided or can be understood so that an investor is aware of their occurrence. Also four of the main concepts in behavioural finance are described and explained. This paper touches upon the relatively new school of thought of behavioural finance to give a more comprehensive look at how it affects investors in investment decision making. It also seeks to answer question about financial anomalies that occur and cannot be answered through the theories of standard finance.Table of contentChapter 1 - Introduction.............................................................................4Chapter 2 - Aim and Objectives..................................................................7Chapter 3 - Literature Review.....................................................................8Chapter 4 - Methodology..........................................................................14Chapter 5 - Analysis and discussion of findings.......................................16Chapter 6 - Conclusion.............................................................................24References.................................................................................................27Chapter 1: IntroductionClassical economics and economic theories that have been around for a long time, which most investment knowledge is based on has always used the concept of the rational economic man. A person, who has no emotions, has a full understanding of everything that is going on around him and is not affected by it. However studies carried out initially by psychologists and then by academics from the field of economics/finance have challenged the assumptions of these classic models that are widely used. They argued that behaviour plays a huge role in an individual's decision making process and can affect the outcomes of a person's decision. From this was born the study of behavioural finance. The study of behaviour finance sets out to see how human opinion and emotions affect financial decision making. Even though behavioural finance is still a fairly new school of thought in the field of economics it is still however an important part of it. At the very early stages of behavioural finance studies were carried out mainly by scholars in the field of psychology. The studies were not directly linked to the fields of economics and the findings were just related to them.When using 'standard finance' which refers to financial...

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