Behavior and finance are two different things. Yet, they are interlinked and can help you make profitable financial decisions. Behavior is all about our human emotions, our personalities, and our sociology. However, finance consists of all the factors like numbers, equations, statistics, and balance sheets. This blog will tell you how these two contrasting features are interlinked with each other and how you can use them to your advantage. We provide quality Behavioral Finance Assignment Help on several subject areas like marketing, finance, accounting, and statistics, and human resources management.
It is assumed in finance that human beings analyze the pros and cons of all the situations occurring around them and then choose the one which benefits them the most. In other words, human beings can be considered rational. However, this rationality comes into question when we take some irrational decisions that make us spend our money.
People have started practicing the investment of money. They take these investment decisions based on previous information, research, and logistics. However, sometimes decisions are taken based on the mood of that person which does not have rationality in it.
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What is Behavioural Finance?
To make you understand this concept in very easy and simple words, behavioural finance is the combination of the two concepts of psychology and finance. There is a theory called the behavioural economic theory which states that the markets are inefficient and that all the humans are irrational. There is a subtle difference between the traditional and the behavioural finance. One of them is a risk. Risk is considered as an objective term that can be quantified in traditional finance. It is calculated as beta or it can be calculated from the standard deviation. However, behavioural finance states that risk is subjective and differs from person to person. This means a person can have different levels of risk-taking capacity. Therefore, it can’t be measured subjectively.
Standard finance has assumed that risk and return have a linear relationship between them. This means that if the risk taken increases, the return received will also increase. In other words, there is a direct proportion between the risk and return. However, behavioural science contradicts this and says that there is an inverse relationship between them. The standard finance says that the decision-maker is rational. However, behavioural finance says that human beings are irrational and hence, the decision-maker is irrational.
The standard finance states that the decisions of humans will always be constant and consistent. Behavioural finance states that the decisions cannot be consistent and constant as there are many factors influencing the decisions. Factors like the decision-maker’s personality or his attitude towards certain things.
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