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Behavioural Finance

The document presents an overview of Behavioral Finance, focusing on how psychological factors influence financial decision-making. It discusses key concepts such as cognitive and emotional biases, heuristics, and their implications on investor behavior and market trends. Understanding these principles can help investors and financial professionals make better decisions and improve financial outcomes.

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6 views13 pages

Behavioural Finance

The document presents an overview of Behavioral Finance, focusing on how psychological factors influence financial decision-making. It discusses key concepts such as cognitive and emotional biases, heuristics, and their implications on investor behavior and market trends. Understanding these principles can help investors and financial professionals make better decisions and improve financial outcomes.

Uploaded by

yourhotmomyy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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BEHAVIUORAL FINANCE

Supervised by :
- Pr. Saloua El Marzguioui

presented by :
- Fatima Ezzohrae LAAOUAR
- Aya El Bakkali
- Fatine Talbi
- Youssra El ouariachi
Planning:

1- Introduction to Behavioral Finance


2- Key concepts in Behavioral Finance
3- Cognitive Biases and Their Impact on Financial Decision-Making
4- Emotional biases and their influence on investment choices
5- The role of heuristics in shaping financial behavior
6- Overconfidence and its implications in finance
7- Herding Behavior and Market Trends
8- Prospect Theory and Investor Behavior
9- The impact of framing and anchoring on financial decision-
making
10- Practical Implications of Behavioral Finance
Introduction to
Behavioural
Finance
Behavioural finance explores how psychological factors influence
financial decision-making.

It examines the emotional and cognitive biases that impact


investment choices and market trends.
Key Concepts in Behavioural Finance
Bounded Rationality Loss Aversion
Investors make decisions based on Preference for avoiding losses over
limited information and cognitive acquiring equivalent gains.
abilities.

Mental Accounting Regret Aversion


Segregating decisions into separate Seeking to avoid decisions that may
mental accounts based on subjective result in remorse.
criteria.
Cognitive Biases and
Their Impact on Financial
Decision-Making
• Confirmation Bias: The tendency to seek out information
that supports existing beliefs and ignore contrary
• evidence.
Overconfidence: Overestimating one's abilities and
knowledge, leading to excessive risk-taking in
• investments.
Anchoring: Relying too heavily on the first piece of
information encountered when making decisions.
Emotional biases and their influence
on investment choices
Fear-based Decision Attachment to Losses Over-Optimism
Making
Investors may hold onto Emotional bias towards
Emotional biases, such as failing investments due to positivity can lead to
fear, can lead to hasty emotional attachment, overlooking risks and
decisions based on even when it's financially making overconfident
market volatility and detrimental. investment decisions.
short-term losses.
The role of heuristics in shaping
financial behavior
1 Anchoring 2 Representativeness
Investors tend to rely heavily on the Investors categorize information based
first piece of information they receive on past experiences, leading to
when making decisions. potential misjudgment.

3 Availability 4 Recency
Investors give more weight to readily Investors may give more importance
available information, even if it's not to recent events rather than
necessarily relevant or accurate. considering the long-term trends.
Overconfidence and its implications
in finance

Overestimating Abilities Risky Decision-Making Dismissal of Risks


Overconfidence can lead to It can result in risky Overconfident investors
overestimating one's ability investment decisions based may dismiss potential risks
to predict market trends. on unfounded self- and fail to diversify their
assurance. portfolios.
Herding Behavior and Market
Trends
1 Information Cascade
Individuals observe others and follow the trend, creating momentum.

2 Exaggerated Market Swings


Herding behavior can lead to overreaction and amplification of
market movements.

3 Risk of Market Bubbles


Collective actions based on herding behavior can inflate asset
prices leading to speculative bubbles.
Prospect Theory and Investor Behavior
Value Function
1
Investors evaluate gains and losses relative to a reference point.

Loss Aversion
2
People are more sensitive to losses than gains of the same magnitude.

Probability Weighting
3 Investors tend to overweight small probabilities and
underweight high probabilities.

Reflection Effect
4 Changing the reference point can alter
an investor's risk preference.
The impact of framing and anchoring
on financial decision-making
Framing
1 How information is presented

Anchor Effect
2
Relying heavily on initial information

Decision Biases
3
Impact on investment choices
Practical Implications of Behavioral
Finance
Understanding behavioral finance can help investors and financial professionals make
informed decisions based on human behavior patterns.

By recognizing cognitive and emotional biases, they can develop strategies to mitigate risks
and improve financial outcomes.

Implementing behavioral finance principles can lead to more effective investment strategies
and client management.
THANKS FOR YOUR ATTENTION

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