Question

What can behavioural finance teach us about finance?

Answer 1

Behavioral Finance is all about what makes investors choose a stock before they buy or sell or to hold and what really inspires them or what kind of biases they'd carry etc. This is more into analyzing the psychology of investor's choices and their behaviour with the market sentiments.

Taking down an interesting example, a doctor tries to do a trade by investing in some pharmaceutical company that he was always worked with. But never tried to look into the liquidity of the company, just gone by some favoritism as a bias and lost some of his stock as the stock performed bad. If this is exemplified as a cognitive bias, now this can be followed by another behavioral bias. Now the same doctor as an investor tries to get back what he has lost in the past and tries to get what he has lost. He tried to buy some more stock assuming to take back twice the profit but the stock has again shown bad performance and he had to wait for a long time and sold the stock at it's original price. This might be considered as an example of Revenge Trading. These are all the types of behaviors that drive investors make their buy/sell decisions. Herd Mentality , aggressive attitude towards to the risk, fully risk averse are also some behaviors shown by the investors.