Behavioural Finance
“Behavioural finance is the study of how psychology affects financial decision making and financial markets.”
Hersh Shefrin (2001)
Behavioural Finance research is principally concerned with decision making in environments of risk and uncertainty. It first came to prominence in 2002 when Daniel Kahneman won the Nobel Prize for economics for his work with Amos Tversky on Prospect Theory. Prospect theory looks at specifically, how people react emotionally to losses and gains of an identical utility. The research states that the emotional effect of a loss is experienced 2-3 times more acutely than a gain of an equivalent value.
Behavrioual finance looks at the role of psychology in the decision making of investors and the consequent effects on markets. This is the realm of financial bubbles, speculation, fear and greed.
A glossary of Behavioural Finance Theories is available here
Although, principally, research and applications within this arena have been applied to investor decision making, practitioners such as Claradan, are realising the full power and value of this area, particularly as we experience such unprecedented change and uncertainty.
The use of this approach makes the study of decision making far more accessible and useful for applications outside of financial markets. It is relevant to senior leaders in both the public and private sector across all industries.
Behavioural Finance Outcomes
- A greater understanding of what motivates and influences decision making.
- The ability to recognise examples of impulsive and irrational decision making and awareness of the type of environments these are likely to materialise in.
- The knowledge to make lasting behavioural change and maintain a high level of consistency and quality in critical decision making.