: What can behavioural finance teach us about finance?
Behavioral finance is based on human psychology. Behavioral finance teaches us about finance that in real world, people are not always rational therefore there are deviations from the efficient markets hypothesis. The investor’s psychology also plays an important role in financial market; sometime investors are bias in their approach therefore sometime it is difficult for investors to take advantage of mispriced securities. Sometime they get trapped in to some misinformation and not able to analyze the situation. The behavior of investors is different in different market conditions.
There are three types of biases that are self-attribution bias, overconfidence and hindsight bias.
What can behavioural finance teach us about finance?
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a) Describe the impact of gearing (i.e. debt) on the cost of capital. b) Behavioural finance posits that investors possess behavioural biases. Discuss the importance of behavioural biases and then list and explain any four behavioural biases.
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