Have you ever thought that even the expert stock market investors & mutual fund portfolio managers often lose in the market to the major market indexes?
Well, it is because when an investor does a research and in-depth analysis to get to know all information about the stocks or other investment securities, it is all based on the prices of those securities.
Now, think about it. If another investor is in the same will get the same information and analyze the data in the same ways. So, ultimately, their predictions or forecasts will be identical or similar in either way. As the hypothesis goes, no amount of analysis will give the investor an edge over other investors. This hypothesis usually called Efficient Market Hypothesis (EMH). According to EMH, the stock markets are efficient. But, current discussion indicates that there is nothing “efficient”. It just simply implies “normal”.
This is why many investors and market professionals often lose in the stock market. But, it doesn’t clear the fact that with being “normal”, how some investors beat the market despite all odds? If you have no idea, then don’t worry! We are going to reveal a simple trick which can help you to keep your head straight in the stock market and become a better investor.
This is what we are talking about. “Behavioral Finance” is a field of study which simply explains, “Why people might make irrational financial decisions?”
In the context of the financial market, the definition of Behavioral Finance is, “it is a combination of psychological theories, particularly related to behaviorism, to economics & personal finance”. Or in other words, we can say that “Behavioral finance all about trying to understand, what makes investors “tick” when it comes to money.”
Hope, you’ve got pretty much idea of what behavioral finance is. It can be considered and used as one of the stock market tips in order to become a smart-investor. Anyways, this approach can help you to understand the stock market movements by looking into the emotions and behavioral patterns of investors. Even as investors, we tend to repeat same mistakes. If somehow we get the information of how and why we are repeating these mistakes, it will prevent us and our returns in the future.
By going through & overcoming the different biases of behavioral finance, you will be able to take complex financial decisions in managing a portfolio which requires a huge cognitive load.
Final Thoughts: –
Overall, we can say that investors are supposed to make investing mistakes. Actually, it is quite normal. What’s important is you accept them, learn from them, and trying to avoid doing it again. The behavioral finance is all about self-awareness through some understanding which can help investors to change their own perception and behavior.
Hope, this would help you in keeping your head straight in the stock market and take right decisions. Nevertheless, if you have any query or would like to share something then don’t forget to comment in the section given below.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.