Behavioural finance studies how emotions, biases, and psychological patterns affect financial decisions. Unlike traditional finance, which assumes investors act rationally, behavioural finance recognises that fear, greed, and overconfidence often lead to poor choices.
In India, where cultural values and emotional decision-making are deeply rooted, understanding behavioural finance can help individuals plan better and avoid costly mistakes. By identifying emotional triggers, investors can make more rational, long-term decisions that support wealth creation.
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Concepts of behavioural finance
Behavioural finance revolves around psychological factors that impact financial decisions. It highlights how emotions and biases influence market trends and individual investment choices. By understanding these concepts, investors can avoid irrational decisions and develop strategies that align with financial goals. In India, where traditional beliefs often shape investment choices, behavioural finance is crucial for fostering rational financial behaviour.
- Herd mentality – Investors often follow the crowd rather than conducting independent analysis. This behaviour leads to asset bubbles and sudden market crashes as people buy or sell based on popular trends.
- Loss aversion – Investors fear losses more than they appreciate equivalent gains. This leads to risk-averse behaviour, where individuals hesitate to sell loss-making investments, hoping for recovery, or avoid profitable opportunities due to fear of loss.
- Overconfidence bias – Investors believe they have superior knowledge or skills, leading to excessive risk-taking. This often results in misjudging the market, trading too frequently, and making costly investment mistakes.
- Mental accounting – People treat money differently based on its source or intended use. For example, individuals may splurge windfall gains while being conservative with their salary, impacting overall financial planning and wealth accumulation.
- Confirmation bias – Investors seek information that supports their pre-existing beliefs while ignoring contradictory data. This selective approach leads to biased decision-making, often resulting in poor investment choices and failure to adapt to changing market conditions.
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