Understanding Behavioural Biases in Finance & Investing: E-BookVW Staff
Nice new e-book on behavioral finance/value investing from safalniveshak.com, below is a brief excerpt and link to the full e-book.
Behavioural Economics and Behavioural Finance are deep and vast knowledge areas that combine psychology with economics and finance and attempt to get into human brain to study in greater detail on how we make decisions in a given situation. Given below are few links that points to the definitions related to these subjects.
Behavioural economics and the related field, Behavioural finance, study the effects of social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation. The fields are primarily concerned with the bounds of rationality of economic agents. Behavioural models typically integrate insights from psychology with neo-classical economic theory; in so doing, these Behavioural models cover a range of concepts, methods, and fields.
The study of Behavioural economics includes how market decisions are made and the mechanisms that drive public choice, such as biases towards promoting self-interest.
Anchoring Bias – Focusing Too Much on One Piece of Information
Anchoring or focalism is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor.
For example, the initial price offered for a used car sets the standard for the rest of the negotiations, so that prices lower than the initial price seem more reasonable even if they are still higher than what the car is really worth.
Examples of Anchoring Bias
1. An investor will have an attraction towards a stock which has fallen considerably from their previous or all time highs – say even from a 52 week high.