assignment behavioural finance

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• Findings from Behavioral Finance
• Losses vs. Gains

The Herd vs. Self

How practical is behavioral finance, frequently asked questions, the bottom line.

• Trading Skills
• Trading Psychology

An Introduction to Behavioral Finance

For decades, psychologists and sociologists have pushed back against the theories of mainstream finance and economics, arguing that human beings are not rational utility-maximizing actors and that markets are not efficient in the real world. The field of behavioral economics gained momentum in the late 1970s to address these issues, accumulating a wide swath of cases when people systematically behave "irrationally." The application of behavioral economics to the world of finance is known, unsurprisingly, as behavioral finance .

From this perspective, it's not difficult to imagine the stock market as a person: It has mood swings (and price swings) that can turn on a dime from irritable to euphoric; it can overreact hastily one day and make amends the next. But can human behavior really help us understand financial matters? Does analyzing the mood of the market provide us with any hands-on strategies? Behavioral finance theorists suggest that it can.

Key Takeaways

• Behavioral finance asserts that rather than being rational and calculating, people often make financial decisions based on emotions and cognitive biases.
• For instance, investors often hold losing positions rather than feel the pain associated with taking a loss.
• The instinct to move with the herd explains why investors buy in bull markets and sell in bear markets.
• Behavioral finance is useful in analyzing market returns in hindsight, but has not yet produced any insights that can help investors develop a strategy that will outperform in the future.

Some Findings from Behavioral Finance

Behavioral finance is a subfield of behavioral economics , which argues that when making financial decisions like investing people are not nearly as rational as traditional finance theory predicts. For investors who are curious about how emotions and biases drive share prices, behavioral finance offers some interesting descriptions and explanations.

The idea that psychology drives stock market movements flies in the face of established theories that advocate the notion that financial markets are efficient. Proponents of the  efficient market hypothesis (EMH), for instance, claim that any new information relevant to a company's value is quickly priced by the market. As a result, future price moves are random because all available (public and some non-public ) information is already discounted in current values.

However, for anyone who has been through the Internet bubble and the subsequent crash, the efficient market theory is pretty hard to swallow. Behaviorists explain that, rather than being anomalies , irrational behavior is commonplace. In fact, researchers have regularly reproduced examples of irrational behavior outside of finance using very simple experiments.

"It's understated to say that financial health affects mental and physical health and vice versa. It's just a circular thing that happens," said Dr. Carolyn McClanahan , founder & director of Financial Planning at Life Planning Partners Inc. "When people are under stress because of finances, they release chemicals called catecholamines. I think people have heard of things like epinephrine and stuff like that, that kind of put your whole body on fire. So that affects your mental health, affects your ability to think. It affects your physical health, wears you out, makes you tired, you can't sleep. And then once you can't sleep, you start to have bad behaviors to deal with that."

The Importance of Losses Versus Significance of Gains

Here is one experiment: Offer someone a choice of a sure $50 or, on the flip of a coin, the possibility of winning $100 or winning nothing. Chances are the person will pocket the sure thing. Conversely, offer a choice of 1) a sure loss of $50 or 2) on a flip of a coin, either a loss of $100 or nothing. The person, rather than accept a $50 loss, will probably pick the second option and flip the coin. This is known as loss aversion .

The chance of the coin landing on one side or the other is equivalent in any scenario, yet people will go for the coin toss to save themselves from a $50 loss even though the coin flip could mean an even greater loss of $100. That's because people tend to view the possibility of recouping a loss as more important than the possibility of greater gain.

The priority of avoiding losses also holds true for investors. Just think of Nortel Networks shareholders who watched their stock's value plummet from over $100 a share in early 2000 to less than $2 a few years later. No matter how low the price drops, investors—believing that the price will eventually come back—often hold stocks rather than suffer the pain of taking a loss .

The  herd instinct explains why people tend to imitate others. When a market is moving up or down, investors are subject to a fear that others know more or have more information. As a consequence, investors feel a strong impulse to do what others are doing.

Behavior finance has also found that investors tend to place too much worth on judgments derived from small samples of data or from single sources. For instance, investors are known to attribute skill rather than luck to an analyst that picks a winning stock.

On the other hand, beliefs are not easily shaken. One notion that gripped investors through the late 1990s, for example, was that any sudden drop in the market is a buying opportunity. Indeed, this buy-the-dip view still pervades. Investors are often overconfident in their judgments and tend to pounce on a single "telling" detail rather than the more obvious average. In doing so, they fail to see the larger picture by focusing too much on smaller details.

We can ask ourselves if these studies will help investors beat the market. After all, rational shortcomings should provide plenty of profitable opportunities for wise investors. In practice, however, few if any value investors are deploying behavioral principles to sort out which cheap stocks actually offer returns that are consistently above the norm.

The impact of behavioral finance research still remains greater in academia than in practical money management . While theories point to numerous rational shortcomings, the field offers little in the way of solutions that make money from market manias.

Robert Shiller, the author of "Irrational Exuberance" (2000), showed that in the late 1990s, the market was in the thick of a bubble. But he couldn't say when the bubble would pop. Similarly, today's behaviorists can't tell us when the market has hit a top, just as they could not tell when it would bottom after the 2007-2008 financial crisis. They can, however, describe what an important turning point might look like.

What does behavioral finance tell us?

Behavioral finance helps us understand how financial decisions around things like investments, payments, risk, and personal debt, are greatly influenced by human emotion, biases, and cognitive limitations of the mind in processing and responding to information.

How does behavioral finance differ from mainstream financial theory?

Mainstream theory, on the other hand, makes the assumptions in its models that people are rational actors, that they are free from emotion or the effects of culture and social relations, and that people are self-interested utility maximizers. It also assumes, by extension, that markets are efficient and firms are rational profit-maximizing organizations. Behavioral finance counters each of these assumptions.

How does knowing about behavioral finance help?

By understanding how and when people deviate from rational expectations, behavioral finance provides a blueprint to help us make better, more rational decisions when it comes to financial matters.

The behavioralists have yet to come up with a coherent model that actually predicts the future rather than merely explain, with the benefit of hindsight, what the market did in the past. The big lesson is that theory doesn't tell people how to beat the market. Instead, it tells us that psychology causes market prices and fundamental values to diverge for a long time.

Behavioral finance offers no investment miracles to capitalize on this divergence, but perhaps it can help investors train themselves on how to be watchful of their behavior and, in turn, avoid mistakes that will decrease their personal wealth.

Raymond A. Mason School of Business. " What Is Behavioral Finance? "

Federal Reserve Bank of San Francisco. " Bubbles Tomorrow, Yesterday, but Never Today? "

• Behavioral Finance: Biases, Emotions and Financial Behavior 1 of 27
• An Introduction to Behavioral Finance 2 of 27
• Understanding Investor Behavior 3 of 27
• Market Psychology: What Is It and Predictions 4 of 27
• How the Power of the Masses Drives the Market 5 of 27
• How to Read the Psychological State of the Market with Technical Indicators 6 of 27
• Herd Instinct: Definition, Stock Market Examples, & How to Avoid 7 of 27
• Financial Markets: When Fear and Greed Take Over 8 of 27
• 4 Behavioral Biases and How to Avoid Them 9 of 27
• How to Avoid Emotional Investing 10 of 27
• 8 Psychological Traps Investors Should Avoid 11 of 27
• 3 Psychological Quirks That Can Affect Your Trading 12 of 27
• Removing the Barriers to Successful Investing 13 of 27
• How to Break Bad Trading Habits 14 of 27
• Random Reinforcement: Why Most Traders Fail 15 of 27
• How to Develop a "Trading Brain" 16 of 27
• Let Your Profits Run: Overview, History, Example 17 of 27
• The Art of Cutting Your Losses 18 of 27
• Positive Feedback: What it is, How it Works 19 of 27
• Loss Aversion: Definition, Risks in Trading, and How to Minimize 20 of 27
• Psychological Coping Strategies for Handling Losses 21 of 27
• Regret Avoidance: Meaning, Prevention, Market Crashes 22 of 27
• Technical Analysis That Indicates Market Psychology 23 of 27
• The Psychology of Support and Resistance Zones 24 of 27
• Going All-in: Investing vs. Gambling 25 of 27
• The Downward Spiral of Trading Addiction 26 of 27
• The Casino Mentality in Trading 27 of 27

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• Behavioural finance
• Study resources
• Financial Management (FM)
• Technical articles and topic explainers

Learning outcome F4c of the Financial Management (FM) syllabus is as follows: Describe the significance of investor speculation and the explanations of investor decisions offered by behavioural finance.

The learning outcome is at intellectual level 1, meaning that knowledge and comprehension of this topic is required.

This article briefly looks at what behavioural finance is and some important terms related to behavioural finance which students should know.

What is behavioural finance?

Behavioural finance attempts to explain how decision makers take financial decisions in real life, and why their decisions might not appear to be rational every time and, therefore, have unpredictable consequences. This is in contrast to many traditional theories which assume investors make rational decisions.

Important terms to understand

One aspect to understand is the market paradox . This occurs because in order for markets to be efficient, investors have to believe that they are inefficient. This is because if investors believe markets are efficient, there would be no point in actively trading shares –which would mean that markets would not react efficiently to new information.

Herding refers to when investors buy or sell shares in a company or sector because many other investors have already done so. Explanations for investors following a herd instinct include social conformity, the desire not to act differently from others. Following a herd instinct may also be due to individual investors lacking the confidence to make their own judgements, believing that a large group of other investors cannot be wrong.

If many investors follow a herd instinct to buy shares in a certain sector. This can result in significant price rises for shares in that sector and lead to a stock market bubble .

There is also evidence to suggest that stock market ‘professionals’ often do not base their decisions on rational analysis. Studies have shown that there are traders in stock markets who do not base their decisions on fundamental analysis of company performance and prospects. They are known as noise traders . Characteristics associated with noise traders include making poorly timed decisions and following trends.

Some investors may have loss aversion , avoiding investments that have the risk of making losses, even though expected value analysis suggests that, in the long-term, they will make significant capital gains. Investors with loss aversion may also prefer to invest in companies that look likely to make stable, but low, profits, rather than companies that may make higher profits in some years but possibly losses in others.

There may be a momentum effect in stock markets. A period of rising share prices may result in a general feeling of optimism that prices will continue to rise and an increased willingness to invest in companies that show prospects for growth. If a momentum effect exists, then it is likely to lengthen periods of stock market boom or bust.

Behavioural finance shows that individuals may not necessarily make decisions on the basis of a rational analysis of all the information. This can lead to movements away from a fair price for an individual company’s shares, and the market as a whole to a period where share prices are collectively very high or low.

An in-depth understanding of all the different behavioural biases and potential impacts of behavioural finance is not required at this level, but the terms and concepts covered in this article may appear in an FM exam question.

Written by a member of the Financial Management examining team

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Financial Markets

Lecture 11 behavioral finance and the role of psychology.

Deviating from an absolute belief in the principle of rationality, Professor Shiller elaborates on human failings and foibles. Acknowledging impulses to exploit these weaknesses, he emphasizes the role of factors that keep these impulses in check, specifically the desire for praise-worthiness from Adam Smith’s The Theory of Moral Sentiments. After a discourse on Personality Psychology, Professor Shiller starts a list of important topics in Behavioral Finance with Daniel Kahneman’s and Amos Tversky’s Prospect Theory. The value function and the probability weighting function, as two key components of this theory, help explain certain patterns in people’s everyday decision making, e.g. the existence of diamond ring insurance and airline flight insurance. An in-class experiment underscores the prevalence and importance of the concept of overconfidence. Further topics include Regret Theory, gambling behavior, cognitive dissonance, anchoring, the representativeness heuristic, and social contagion. Professor Shiller concludes the lecture with some perspectives on moral judgment in the business world, addressing shared values and integrity.

Lecture Chapters

• Human Failings & People’s Desire for Praise-Worthiness [00:00:00]
• Personality Psychology [00:11:37]
• Prospect Theory and Its Implications for Everyday Decision Making [00:20:14]
• Regret Theory and Gambling Behavior [00:35:53]
• Overconfidence, and Related Anomalies, Opportunities for Manipulation [00:40:40]
• Cognitive Dissonance, Anchoring, Representativeness Heuristic, and Social Contagion [00:57:16]
• Moral Judgment in the Business World [01:12:38]

11.1 Human Failings & People’s Desire for Praise-Worthiness

Professor Robert Shiller: OK, good morning. So, I wanted to talk today about Behavioral Finance or about Psychology and Finance. This is a longstanding interest of mine. I’ve been involved with it for over 20 years. It’s not really emphasized in your textbook, Fabozzi and his co-authors talk about a lot of things in the financial world, but not about the underlying human behavior.

Behavioral Finance, or Behavioral Economics more broadly, is a kind of revolution that has occurred in finance and economics over the last 20 or 30 years. And it remains somewhat controversial. I don’t quite fully understand why it is that people polarize as much as they do, but some people don’t like this. We’re coming along to be the majority, I think. People are now regarding Behavioral Finance as an important element of finance. But the real problem is that people are complex and our financial institutions, as I’ve emphasized, are designed for real people and their functioning depends on the behavior of real people. And it’s not as simple. You know, another revolution that’s occurring parallel, of bigger significance, is a revolution in neuroscience about the human brain. And the human brain is a very complicated organ.

Economists have liked to invoke the principle of rationality as an underlying component of their theory, and that has been useful, but it’s of limited use, because people aren’t rational. They are often rational; they’re not completely rational. And very often, people behave stupidly. I’ll put it that way. That includes everyone, including me, because we’re human and we have limits.

One thing about the human species is that we are aware of other people’s weaknesses and have an impulse to exploit them, OK? So when you see other people behaving stupidly, sometimes you think, maybe I can turn this to my advantage. OK? And that becomes a problem. The history of humankind is a history of exploitation of one person by another. Not entirely, but I’m saying it has that as an important element.

So, I’m going to talk about these human failings. It’s not to say that people are stupid, I’m just saying they’re people, and we’re all imperfect. We’re smart in some dimensions and we can be very smart, but we can also make important mistakes.

But before I start, I wanted to try to put this into a perspective. Maybe, I’ll return to this at the end of the lecture, but I wanted to start out on an upbeat note. I’m going to talk about all kinds of human errors, but I wanted to start on an upbeat note that the business world generally doesn’t exploit people terribly, I believe, that very characteristically successful businesses in finance and elsewhere consider their long-term advantage and the reputation they have. So, doing something that is blatantly exploitative of human weaknesses will work against their long-term advantage. You’ll see a lot of human failings, but we don’t see people cashing in on them as often as you’d think. And beyond that, I want to emphasize also that another aspect of human behavior is morality. Evolutionary biologists think that this evolved along with our other traits, that we have an impulse to be moral. And so, in the long run, you might not really gain so much satisfaction from exploiting other people’s mistakes. And so, you don’t necessarily do that. So, that’s why we have a lot of weaknesses outlined and we won’t see significant or serious exploitation of them as characteristic.

Now as you know, I have chapters from my forthcoming book assigned for this course. And I looked back on what I put up for you to read and I keep thinking, gee, this really wasn’t ready. So, I had a chapter for this section of the reading list about Behavioral Finance. And I thought, I didn’t really get it right. I know what I was trying to say, but maybe I should–what I start out in, in that chapter is talking about Adam Smith and his book The Theory of Moral Sentiments. Now just to remind you, Adam Smith was a professor in Scotland in 1759. He was a professor of moral philosophy, because there were no professors of economics in those days. And he wrote in 1759–maybe I should write some of this on the board. He’s probably the most important figure in the history of economic thought.

So, in 1759 he wrote his The Theory of Moral Sentiments. And in 1776, he wrote the more famous book, The Wealth of Nations. So, this is The Theory of Moral Sentiments. The Wealth of Nations is considered the first real treatise on economics and it’s a wonderful book. And it’s still very readable today. His The Theory of Moral Sentiments is not so widely read. But it’s not really economics; it’s a book about psychology and morality. I find it very good, even 250 years later. He went through many editions on this book, because maybe he thought it was his most important work.

But the book starts out about selfishness and altruism. And the real question, which he thinks defines economics, is, are people really completely selfish? Sometimes it seems that way, that their presumed benevolence is just an artifice for their own benefit. But he wonders, how does an economy work if everyone is totally selfish? And he ends up concluding that they’re not. I thought it was very interesting, the way he put it. The thing he emphasized right at the beginning of the book is that people inherently love praise, all right? We crave the approval of other people. And so, praise is a fundamental human desire.

But then he reflected on it and he said, do people really want praise itself or is it something else that they want? Well, think of it this way. Suppose people made a big mistake and thought that you had accomplished something, but there was a mix up. You know, it was really somebody else who did it, not you. And it’s just a complete mistake. You had nothing to do with it, but you find lots of people praising you. Would that really be pleasurable? And suppose you even know that they’ll never find out that I didn’t do it. Well, Smith said, it probably isn’t, right? Think about it. You internally are thinking, I’m getting all this praise, but I know I don’t deserve it. So, I don’t enjoy it. And then he went on to say that, especially among people who are more mature, he says more mature people–not everyone makes this step–but he says, adults, normal, mature adults, make a transition from a desire for praise to a desire for praise-worthiness. I want to know that I am the kind of person who will be praised and I don’t need to get the praise.

And he said, it’s that tendency ultimately, which makes an economy work, that people don’t care just about praise. He gives an example of mathematicians. And he said he’s known many mathematicians in his life and he finds that they’re almost all obscure. The public doesn’t know about mathematicians. They couldn’t explain to the public what they do. And they don’t seem to care at all, because they know the public doesn’t appreciate mathematics. And so, there’s a few mathematician friends who understand what they do and may praise them. But ultimately, a mathematician can sometimes do the work completely unknown, you know? And it’s the praise-worthiness that drives these people.

You may think I’m being too idealistic, when I say this, but I think that the finance profession–this is what I was trying to say in that chapter–that the finance profession, like other mature professions, is really dominated although there’s a lot of funny things that happen, it is really dominated by people who have reached this desire for praise-worthiness. And so you’re not going to exploit people extravagantly. Just because, why would I do that? This is not a good thing. I wouldn’t feel good about it. Well, some people will.

Now, I wanted to also mention, not everyone reaches this mature state that Adam Smith describes. And that’s one of the complexities of human society. And I think that the finance profession has a problem with other kinds of people.

11.2 Personality Psychology

Now there’s a whole branch of psychology called Personality Psychology that categorizes people by their personality. And we’re not all the same. And in our society, we have many different kinds of personalities. A successful society promotes people up who have the praise-worthiness desire. We try to recognize them and we try to put people of character into important positions, with not complete success. But I wanted to just briefly talk about–this is a lecture on psychology. I wanted to talk about other personality types. And I was going to use a book called The Diagnostic and Statistical Manual Edition IV published by the American Psychiatric Association. They’re coming out with a fifth edition in 2014.

DSM-IV is kind of a household word around my house, because my wife is a psychologist. DSM-IV is actually controversial among psychiatrists, because it’s too cut and dry for some of them. What it tries to do is, identify mental illnesses and personality types in a quantifiable, reproducible way, so that we can define who has this mental illness or who has this personality type. And so it gives you checklists and it says, the patient must have exhibited at least three of the following five behaviors. And then, there will be another checklist. And so you keep score and you can actually diagnosis personality disorders. I’m just going to mention one of the many personality disorders.

One of them is called APD, called Antisocial Personality Disorder. And so they have checklists, but just to give you a sense–oh, the Antisocial Personality Disorder is called psychopathy, or one kind of APD is psychopathy. Another one is called sociopathy and–I don’t know. There’s a huge literature on these.

But according to DSM-IV, 3% of the male population in the world is APD, and 1% of the female population. A simple definition for APD is a “jerk.” There are more male jerks than female jerks, apparently, according to their–this is all quantifiable and done.

But what is an Antisocial Personality Disorder? It has the following characteristics: lack of remorse, frequent lying, lack of empathy, superficial charm, shallow emotions, distorted sense of self, constant search for new sensations.

Have you met someone like that? You probably have, because that’s 3% of the population. I’m not anti-male, when I point out there are three times as many jerks among males as females. Females have characteristically different personality disorders. And you can look down the list. It’s much more than 3% of the population that would be diagnosed with one or the other.

So, you know, an APD person is manipulative, feigns affectionate or warm feelings, but doesn’t feel them, and is trying to deceive you.

Once a student came to my office and asked to sign up as my research assistant. I was talking and I thought, well, maybe. I said come back and talk to me. Later on, I read about him in the Yale Daily News. He was an impostor student. He was not a Yale student. And he had been around to other university–he was an impostor at like three different campuses. There was something wrong with this person, right? Kind of made me feel–then he came later and asked me for a recommendation letter. I couldn’t believe it after I read about him in the Yale Daily News.

This is extreme, right? And so, incidentally, someone did a study of APD by going to a prison and categorizing the inmates using DSM-IV standards. And they found that 40% of the prisoners had APD. Also, neuroscience people have found that there are differences in the prefrontal cortex that are correlated with APD. So it seems to be–it’s a problem we have in our society that some people have a brain structure that’s a little different. And it may make it difficult for them to behave in a good way.

We’re learning more and more about neuroscience. It’s interesting to me that Adam Smith’s book still rings true though after–there’s some basic common sense that we all learn. You have to judge people and you have to learn their character. And you have to be a person of character for, in the long run, that’s what you want. It gives you what you want in life.

Oh, another thing I wanted to say is that people are manipulable. Unfortunately, true. And unfortunately, we live in a world where it’s hard to avoid manipulating people at all, because we have a free enterprise system that encourages competition. And if the competition is manipulating people, how do you completely stay clear of that? I think this is one of the contradictions of our society. A very simple and obvious manipulation is, they’ll put a price on some item they’re selling, like $9.99, all right? So you’re like, well, why didn’t they just say $10.00, right? Well, you know why they didn’t. It’s called ”pricing points” in marketing. Because $9.99 sounds a lot less, psychologically, than $10.00. So, everyone does it, almost everyone does it.

But is that bad? Well, it’s bad in a way. It’s manipulative, isn’t it? I mean I’m annoyed by it. Maybe you are, too. But if you were in business, would you do that too? You might feel that you have to and it’s a harmless sort of manipulation. It’s not hurting anyone really. They’re maybe buying a little bit more than they want. See, that’s the kind of thing that comes in.

So, in looking at financial institutions, they’re often manipulative in that sense. It’s similar to a politician. If you want to be a member of Congress or whatever, you can’t say what you really believe, right? Because you won’t get elected. You’ve got to kind of doctor your opinions to the public opinion. But you might have a moral purpose underlying it all, because you want to get elected so you can do good things. So, you do end up saying things. So, it’s hard to judge people, good or bad. It’s an overall sense you get of someone’s character. That people are doing things that appear somewhat manipulative and somewhat bad, but you get an overall sense of the person through time. And ultimately, our society, within limits, rewards people that show character through all the confusing details.

11.3 Prospect Theory and its Implications for Everyday Decision Making

Now I wanted to move–that was my introduction. I wanted to move now to discussing some particular aspects of Behavioral Finance, or more broadly Behavioral Economics. And about human failings that are exploitable by somebody and are somewhat exploited, but remain. I wanted to start out with what’s probably the most famous element of Behavioral Economics. It’s Prospect Theory and it was invented by two psychologists, Daniel Kahneman and Amos Tversky, in the late 20th century.

They called it Prospect Theory because it was a theory of how people form decisions about prospects. And a prospect is a gamble. It’s about people’s decisions under uncertainty. And in very simple terms, the Prospect Theory says–now there’s a huge literature on this, so I’m trying to give you a very quick description of it. That there’s something called a value function, which represents how people value things. And there’s a weighting function, that’s the two parts, which shows how people infer or how they deal with probabilities. And I just wrote simply what Kahneman and Tversky says. I’ll draw a picture of the value function and the weighting function. And this will be very quick and you’d have to read more, but the way people value gains or losses–let me see. I better draw the line in the middle. OK, and these, we’re talking about financial gains, so these are gains, and this is zero, and this is losses. Well, negative. What I have on the horizontal axis is wealth or money or something like that. Zero in the middle, OK? And then, we have on this axis value, which is something like utility. I’ll erase my zero, so it doesn’t get in the way.

What they find is, that people’s value has a funny shape. We don’t weigh gains and losses linearly. In the positive quadrant, when we have positive gains, there’s diminishing value like that. It doesn’t ever slope down. It’s concave down like diminishing marginal utility in economic theory. But for losses, it looks something like this. It’s concave up. I’m exaggerating a little bit, but this is a diagram that Kahneman and Tversky wrote in their famous Econometrica article 30 years ago.

So, there’s diminishing marginal utility for gains, but there’s the opposite–well, we have concave up. And there’s a kink. Note that the value function has a kink at the origin. So, what does this mean? OK, first of all, this origin is a–from what point do I estimate gains and losses? That’s called the reference point and it’s psychological. And it’s subject to manipulation. The reference point is the zero, from which I measure things.

So, first of all, the reference point is probably today’s wealth. But it can be something else if people are manipulated by the way something is presented to them. Framing, according to Kahneman and Tversky, is presentation. So, I can give the same prospect to people, but word it in different ways that suggests a different reference point. And that will change people’s behavior. So, you can manipulate people by describing something in different terms, by suggesting a different reference point. But typically, the reference point is today’s wealth.

The kink means that people are very conscious of little changes in their wealth and they’re spooked by them. I’m really afraid, because my value drops very rapidly, even for a small loss. So, if you were to say, lose $5 this morning. You had it in your pocket and you lost it on the way to this lecture, you would feel exaggeratedly bad about that. You should really regard $5 as just nothing, because the present value of your lifetime income is in the millions, so what’s $5? But you don’t think that way. So, you’re spooked and deterred by small losses, and less encouraged by small gains.

This kind of thing allows businesspeople to exploit people if they want to. If people are so focused on these little changes, then you are encouraged in business to try to pick things out that people are paying attention to, like small things, and sell insurance policies on just those things. Insurance should be concentrated on the really big things, like life insurance. You know the fact that one of your parents could die and the children’s family would be out of money for the rest of their lives. That’s a big thing. But it may not work to sell that kind of insurance. You can do something that is more focused on what people are watching and make it something little so that it doesn’t require them to spend so much money.

The classic example of that is funeral insurance, OK? You go around telling people–and for some reason this sales pitch works, and it’s worked for thousands of years. They sold this in Ancient Rome. You tell people, if someone in your family dies, you could have an expense of getting a proper burial for this person. It costs money. And so, they would insure that one thing, OK? And it was a little thing, but it works to sell that. Another example of it is airline flight insurance. You’re insured for this flight on the airplane, OK? I heard an ad for funeral insurance recently. They’re still doing this after 2,000 years, because it still works and it’s manipulative. That’s not what you should do for people. You should not pick out some little thing.

Or they also have diamond ring insurance. After an engagement, some women will want to buy an insurance policy on the diamond, because it can actually fall out of your ring and lose it. But that’s like, what is it? $5,000 or something? It’s not big; it’s not essential. And if you’re insuring that and not other things, you’re making a mistake. Fortunately, the insurance industry is not too–it has come around to do things that are more–they are doing things that matter and are big. And that’s because this Kahneman and Tversky value function is–it represents an error that people are prone to be making. But it’s not total and not complete. And so ultimately, people don’t go to insurance companies that manipulate them. It gets around and eventually people come around in wanting something better. So, while there is some manipulation, it’s limited.

The other aspect of Kahneman and Tversky is the weighting function, OK? I’m going to draw again a picture of it. This time, it’s how people psychologically think about probabilities. This again is Kahneman and Tversky. A probability is a number between 0 and 1 or 0 and 100%. I’ll put 0 here and 1 here. We can tell someone the probability of something, but they can’t accept it psychologically. The errors that people make are described by the weighting function. What the waiting function is, it’s the psychological impact. You are behaving as if you just don’t understand the probability.

So, what Kahneman and Tversky say is, that for very low probabilities people may round them to zero. And for very high probabilities, they may round them to one. But if they decide not to round them to zero or one, they exaggerate the difference between zero and one. You just can’t think in terms of a continuum of probability. So, this is what the weighting function–this is the weight as a function of the probability. For low probabilities it’s zero. I’m going to maybe exaggerate it here. Then it jumps up. It’s something like this, and as it gets close to one, it jumps up to one again. So you see, it’s like a broken line segment. And there’s been various versions of this theory, but this is the simplest version of it.

So that means, if you’re getting on an airplane, you think, well, what’s the probability of this airplane crashing? Well it’s probably something like 1 in 10 million or, what is it? Even less than that. So most of us, in our mind, just say, it’s zero and I’m done. I’m not going to think about. I’m not going to worry about it. So, we’re down here. We’ve rounded it to zero, OK? But some people don’t round it to zero. And for them, they just blow it out of all proportion in their minds, and it becomes exaggerated. So, I have it here, so it looks like it’s a half. This would be one here and this is about 0.4. And then ultimately, if the probability gets really high, then I’m not even going to think about it, it’s one, OK?

In some of the most primitive languages in the world, there’s only a couple of numbers. There’s zero. There’s one. Maybe there’s two or three, and then there’s no more numbers. Well, our minds are still very primitive in dealing with probability. So it’s like there’s only three probabilities. Can’t happen, may be, and will happen, OK?

So, I think airline flight insurance is an example of trying to manipulate this personality characteristic. So, it means that they’ll catch all the people who exaggerate it, right? They used to have vending machines outside of airlines. The vending machines would encourage you to buy just for this flight. They put it right there when you’re getting on the flight. And so that’s when you’re most nervous. If you’re one of these people who’s up here. And of course, most people don’t buy it, but they don’t have to sell it to everybody. They just sell it to these people and they charge an outrageous price. But I haven’t seen these vending machines anymore. This is interesting.

Economists wrote about them 30 or 40 years ago and they used to be everywhere. And they just kind of disappeared–do you ever see one of these? I think they’re gone. Why is that? Well, somehow we get past things like that. It’s not like Kahneman and Tversky are representing immutable errors. These are errors that naturally happen. But you can get past it. And you end up wanting to deal with people you trust. So, you see some vending machine at the airport and you think, well, my insurance agent isn’t recommending I get this. I’ve got some kind of insurance. So, you walk past it. There’s a professor in Germany at the Max Planck Institute [for Human Development] in Berlin, Gerd Gigerenzer, who has been taking on Kahneman and Tversky in saying that they’re right that people show these tendencies for errors. But I can train people out of them with no problem. I just tell them this is an error, and teach them then, and they don’t do it anymore.

Gary Gorton just did a seminar here on errors that people make in financial–no, Nick Barberis here at SOM, and he was using Caltech [California Institute of Technology] students and tested their ability to prevent certain kind of errors like this. And he found that even the Caltech students made these errors just horribly. We’re wondering, aren’t they supposed to be bright? Those are young math geniuses. But about a third of them got everything right. So I’m thinking, you know, they’re only undergraduates. By the time they get along, if they go–they’ll eventually be trained out of these errors. But right now, they’re behaving just like Behavioral Finance says they will.

So anyway, I think that you will find that Prospect Theory explains a lot of things that go on in finance, but it doesn’t explain everything. And let me move on.

11.4 Regret Theory and Gambling Behavior

So, want to talk about–let me see. I have so many things to tell you about here. And I’m thinking about my time.

It’s a huge field, Behavioral Finance. Let me mention a few other things. Regret Theory is a theory that–it’s kind of related to Kahneman and Tversky. It says that people fear the pain of regret. There’s an old expression: “I was kicking myself,” because I made some bad decision. Well, that’s a painful experience when you did something wrong. This is represented somewhat in the kink in the Prospect Theory value function. But Regret Theory says that there’s actually a painful emotion that you’re wired not to like to have made a mistake. And so then, you end up designing your life around that and trying to avoid doing anything that you might regret later. And it can create problems. You may make bad decisions, because you’re overly worried about regret.

Gambling behavior. Anthropologists have reported that gambling occurs in every human society. And so, it’s one of the human universals. Not that everyone does it, but in every society you’ll find people that do it. I have a 1974 study. It found that 61% of U.S. adults actually gambled at least once for money in that year. I bet it has gone up. There’s more opportunities for gambling and it’s gone up. 1.1% of men are compulsive gamblers and 0.5% of women. This is another male trait. Somehow men are more vulnerable to compulsive gambling than women. But it’s only a factor of 2-to-1. But it’s an addiction that happens that distorts people’s thinking. And it’s such an addiction that we have an organization called Gamblers Anonymous that helps people with this. It ruins people’s lives. People end up getting a divorce, because you can’t stay with someone, married to someone, who is squandering the family money. They do it. They end up sneaking around to gamble, like drinkers sneak around for the next drink. Gambling behavior, it seems to be associated psychologically with a self-image, a sense of who I am and why I’m an important and good person. A sense of competence. Most gamblers do things that they think are revealing of their competence. And they tend to pick a certain form of gambling that they become psychologically identified with. And they avoid any other form of gambling.

Gambling behavior is part of what goes on in the stock market. Certain people who have a personality, which makes them particularly interested in gambling, find that a life in finance can give them the kind of stimulation. Gambling behavior, by the way, is almost like a drug addiction in a sense. People who are depressed may go to a gambling casino as a way of getting themselves out of the depression. And they say that when they walk into the casino, suddenly “my troubles are gone.” “I feel invigorated and alive.” Almost like it creates a hormonal difference that they seek, and it’s almost like injecting yourself with something, so it’s a very hard thing to conquer.

I mentioned before, when the New York state in 1811 created the first corporate law that produced a lot of questionable companies, people then said, this is just gambling. It’s bad. But the other side of it is that this same gambling behavior, it’s not usually a pathology. It’s an aspect of human sensation-seeking of various aspects of our psychology that drive us. What the stock market is, in some sense, is a way of channeling this kind of behavior into something productive instead of just a game. And so, they make it very clear in the stock markets of the world, this is about business and this is productive. The same emotional patterns that created gambling behavior as a human universal underlie some–this is not abnormal, it’s most people. Underlie traits that work out well.

11.5 Overconfidence, and Related Anomalies, Opportunities for Manipulation

OK, the next major thing I wanted to talk about is overconfidence. And psychologists have found that there’s a human tendency to overestimate one’s own abilities. We all think–not all of us, most of us think we’re above average. Some of us think we’re way above average. And this tendency has been revealed in a number of experiments. I thought I would try one on you. I don’t know if it will work. I’ll try it on this class, if you will participate in this experiment by a show of hands.

I’m going to ask you–I have three questions here. And I want to ask you to write down a 90% confidence interval. Do you have a pencil to write this down? And then afterwards, I’m going to tell you the answer and see if it fell in your confidence interval. OK, so this is what it is.

What is a 90% confidence interval? It’s a range of values, so that you are 90% sure that the true value lies in this range. So, if I asked you, what is the population of New Haven? You might say, 90% confidence interval that’s between 50,000 and 150,000. That means, you’re 90% sure that the population falls in that range. And so, you should be right 90% of the time. If I ask you to give 90% confidence intervals, you should be right 9 times out of 10. If I ask for a 99% confidence interval, you have to widen the interval and you should be right 99 times out of 100.

So, what I’m going to ask you to do, if you will cooperate with me, is give 90% confidence intervals for–I have three questions I’m going to give you. But I have to ask you to be honest, otherwise this thing won’t work. You could game me by just giving excessively wide confidence intervals, right? From the ”zero-to-infinity” type. Then you’ll always be right, but you’re not playing honestly. So, I have to appeal to your character to do this honestly, OK?

So, I have three questions here. I just changed the questions. The first is–now what you have to write down on your notepaper somewhere is your honest estimate of a 90% confidence interval. And so, the first question is, the world population–how many people are alive in the world? As of, I think it was 8:00 a.m. this morning [addition: February 21, 2011]. The U.S. Census has something called the World Population Clock and just go–don’t cheat. I know some of you have laptops. Don’t do it. But after this you can search Google on World Population Clock and it shows you minute-by-minute how many people there are in the world. Every birth and death. It’s not actually recording them; it’s a fake. But, I mean, it’s supposed to be an estimate. So, I got the world population. So, what I want you to do, can you write down a lower bound and an upper bound for the world population this morning as measured by the U.S. Census? OK, can you write that down? But I don’t want you to make it too wide. Remember, I only want you to be 90% sure. And I don’t want you to make it too narrow, because then you’re more likely to fail. So, you’ve written that down, the world population?

OK, my next question is–2. The world, what does it weigh? Well, actually, it’s the mass, in kilograms, of the world. Can you write that down? This is astronomy. Let me say, I’m asking for it in kilograms. But you can do it in metric tons. That just knocks off three zeros. A metric ton is 1,000 kilograms, OK? And just so you’ll know for sure, that’s not the same thing as a long ton, which is U.K. The United Kingdom uses the long ton, which is 2,240 pounds. I just looked this up. And is 1.1 metric ton. And it’s not exactly the same as a short ton, which we use in the United States, which is 2,000 pounds, which is 0.98 metric tons. Just tell me, how many tons. That’s not going to affect your 90% confidence interval, right? Just tell me how many tons does the earth weigh. OK, all right? And then that’s the second and I have one more question.

How many languages are there in the world, OK? Now, I know you might complain, this is a matter of definition, because sometimes two dialects might be considered a separate language. Well, I’m asking you to give me the number–the world authority on languages is an organization that has a website called ethnologue.com. And if you go to that website, they’re always discovering new languages. They keep track of it. New languages keep getting discovered, because some guy is hiking out in Siberia and they go to this little village, and say, hey, these people are speaking a language that have never been documented before. So, it’s this process of learning languages. They also keep dying out, because there’s just elderly people in this village, and when they die you know this language is going to die with them. So anyway, the question is, I want your 90% confidence interval for the number of languages, as defined by ethnologue.com. You have to guess how they define a language.

But you have an idea more or less what a language is. It’s more than a dialect, because they can still understand each other if they speak different dialects. We’re talking about really different languages.

OK, have you written down three confidence intervals? OK, so I’m going to write down the answers and I hope this works. I’m trusting to your honestly in getting these things, because you good game me and make this not work. But give me your honest count. So, I’m going to write down the correct answer. So, the world population as of 8:00 a.m. this morning [addition: February 21, 2011] was 6,901,330,581.

Now, can I get a show of hands, how many peoples’ confidence interval includes that number? OK, can someone tell me what percent that is? That is not 90%. You’re doing pretty well, though. What do you think, Oliver?

Student: About 80.

Professor Robert Shiller: Think it’s 80? See them up again. Maybe it is 80, all right. You’re doing really well. Some honest people here didn’t put their hands up. All right, well, that’s one. So, we did 80 instead of 90.

What about the weight of the earth, OK? In kilograms. Well, it’s 5.974 x 1024. And I’ll give you that in tons. It’s 5,974 billion billion tons. You got that, OK? You might have to do some calculation. It’d be 5.9734 x 1018. [correction: 5,974 x 1018 is the weight in tons.]

OK, can we do a show of–how many people had a number in–how many people are in the confidence interval there? All right, Oliver, what do you think? What’s the fraction?

Student: 5%, maybe 10.

Professor Robert Shiller: 10%. OK. So this one, you did really well on world population. 80, 10.

The last one, how many languages are in the world? Well, according to ethnologue.com there are 6,909 languages this morning [addition: February 21, 2011]. OK? How many people got that within their confidence interval? OK, what do you think, Oliver?

Student: About the same, 10%.

Professor Robert Shiller: 10%, OK. Why did you do so much better on world population? Well, thank you for being honest with me. I think it worked once again. The overconfident. So, why is it that people are overconfident like this? And psychologists have tried to describe, what it is that goes on in people’s minds that produces answers like this.

One of them is that, people seem to have a sense that they understand the world more than they really do. It’s an illusion. Actually, the world is just infinitely complicated and there are so many surprises. When you think about a question like this, there’s many different perspectives that you can take. And if you thought more about it, your imagination might help you to widen your confidence interval. But you can’t think of all the perspectives at once. And so, you tend to gravitate to the first one that comes to mind and it gives you an underestimate of the confidence. So, that is overconfidence. By the way, I think it’s a little bit higher in males than females. I didn’t do a separate male/female count. But females [correction: males] are definitely overconfident. That’s the so-called macho personality that’s supremely overconfident, which is–that’s not in DSM-IV. I don’t think it is, but it is more common among males. But it’s really, everyone is overconfident. There’s no important sex difference here.

Incidentally, I think that overconfidence, and this is an important phenomenon, it goes beyond yourself. It extends to your friends. And you exaggerate–there’s a tendency for people to think that I have very smart friends, OK? I was reflecting the other day. When I was an undergraduate at University of Michigan, I was in the honors program and we thought we were pretty smart. And I had a number of young people that I just imagined were heading toward really great careers. There was one student that we called Young Jack Kennedy. You know, this was some years ago. Jack Kennedy was president of the United States. We thought he was a genius. That was probably wrong, too, right? None of these people are geniuses. I was thinking that most of my friends ended up in very good careers, but nothing that you would think was spectacular.

I had one friend as an undergrad, who I thought was a genius, and his name was Bruce Wasserstein. Anyone ever heard of him? Maybe not. Well see, that’s it. But he founded his own investment bank called Wasserstein Perella, became really rich and then he bought interest in Lazard Freres, the French investment bank. He was a real big shot on Wall Street. I met him again about 10 years ago and then he died. God. He had a heart attack and died. So, I know his whole life. I saw him when he was 18 and I’ve watched his whole life, and it’s now history. It’s kind of scary. But I remember thinking he was a genius as an undergrad. I was wondering, what was wrong with my judgment? Why did I see so many other geniuses? Now that I think back on it, he had a sort of real world common sense that amazed me. He just knew things that–it wasn’t fake knowledge. He seemed to know how things worked. So, I guess I was right about one of them. But not enough that none of you have heard of him right? He has an investment bank named after him, right? You should have heard of him, but maybe not.

But anyway, this thing affects peoples’ thinking, too. I think that we tend to think that the head of state who’s running, the head of our central bank is a genius. And this really clouds our thinking. It’s like our ego extends to the other people that we associate with ourselves. Now, the head of a central bank in another country we have no respect for. It’s only in our own country, because it’s part of our ego involvement that produces this overconfidence.

This tendency for overconfidence produces a lot of anomalies and opportunities for manipulation. So, for example, Rakesh Khurana, who is a professor at the Harvard Business School, has written a book called Search for the Charismatic CEO [correction: Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs]. He claims that there’s a tendency for people to think that CEOs are geniuses. Or at least the one that we found is a genius. And companies then seek out a genius CEO to put in charge of the company as a kind of manipulation of the stock market. They think if we get–you know, if we got some guy who’s run other companies successfully in the past, he must be a genius. Put him in our company, our stock price will go up, then we can sell our executive–we can exercise our options and make a lot of money by putting in this fake genius.

And Khurana says, well, there are some people who are maybe geniuses at management, but most of the time they’re just lucky. And we tend to develop overconfidence. And then what happens, according to Khurana, is, you put in some guy who turned around some company spectacularly, supposedly. You bring him in to run a new company and he doesn’t know anything about this new company, right? But he has to justify himself, so he lays off a lot of people and shuffles things around, and just destroys everything in the company, and ruins things.

This is related to another author that I recommend. I’ve mentioned him before, I think. Nassim Taleb wrote a book called Fooled by Randomness. He’s Lebanese, but now in the U.S. Nassim Taleb, Fooled by Randomness, that says that most of the things that happen in life are just chance. We tend to ascribe them. If they happen to us, we conclude–we’re very quick to conclude that it’s a sign of our own genius. And if it happens to someone that is a friend of us, then you think, well, I have genius friends, isn’t that nice? And so, it leads to mistakes.

11.6 Cognitive Dissonance, Anchoring, Representativeness Heuristic, and Social Contagion

OK, let me go to another–how much time do I have–cognitive dissonance. This is another psychological principle. The term was coined by sociologist Leon Festinger in the 1950s, I believe. I actually met this guy. That’s the nice thing about being in academia, you meet all these great names if you’re in long enough, eventually.

But what is cognitive dissonance? It’s a judgmental bias that people tend to make, because they don’t want to admit they’re wrong. Maybe I’m oversimplifying this mistake. It’s painful to think, that I believe something and it was wrong, so people will cling to old beliefs and try to find evidence that supports their beliefs, because they have an ego involvement with the belief. And so, I will be biased.

The famous experiment indicating cognitive dissonance, done by some psychologist, had the following form. They got a list of people who had just bought a car and they knew what make of car. They got the list from car dealers, so they knew exactly what car they had just bought. And they called these people up and asked them to participate in a psych experiment. Or I think they said a marketing experiment. They didn’t let them know that they knew what car they had just bought. And then, the experiment was the following. Let’s go through a number of–what magazines do you read? And they said, let’s get these out. They got all the magazines that were on the newsstand. And they said, let’s look through page by page and tell us which ads you remember reading.

And what they found is that people read the ads for the car they just bought. And they avoided especially the car that they thought they might buy, but decided not to buy. So, after you buy a car, you want to confirm your belief in it. So, you selectively get information that confirms your belief. And so, this cognitive dissonance is another factor. It’s been demonstrated. It’s an error that people make. It doesn’t mean that people–again, none of these errors is unviable. People will make the error and then they’ll learn from their mistakes and they’ll correct. They’re not totally cognitive dissonant, but it’s just a kind of error that keeps coming up.

So, I give you a couple of examples of cognitive dissonance and its effects on finance. So, Will Goetzmann is a professor here at the Yale School of Management, and a couple of his co-authors found that mutual fund investors–when a mutual fund does very badly in its investment performance, many or most investors sell the stock and get out of it. But some of them hang on. And they thought that that was due, perhaps, to cognitive dissonance. Because I bought this fund, I don’t want to sell because I was right. So, what they did is, they interviewed these people and they found that these people didn’t even know how badly the fund has done. They had blocked it out and they had an exaggerated impression. An exaggerated impression of the success–which is characteristic of cognitive dissonance. You just forget the evidence that’s contrary to your theory and you keep assembling evidence that supports your theory.

I have another example of cognitive dissonance and this one was produced by a Professor Sendhil Mullainathan at the Harvard Economics Department. And Mullainathan looked at financial advisors–and his co-authors. What they did to study that’s a whole big profession. I remember at the beginning I pointed out how many hundreds of thousands of financial advisors there are. What they did, it’s an interesting experiment. They hired actors to go to financial advisors and ask for their help. And the experiment was the following.

They would say the same thing to each financial advisor, but the different actors would present their existing portfolio differently. In other words, you’d go to the advisor and you’d say, I have a portfolio of investments and I’m almost entirely in money market funds. That’s all. You’d just say that. You wouldn’t express any opinion at all. Another actor would go and say, I’ve got all of my portfolio in tech stocks, right? Or I’ve got all of my portfolio in options.

Now, what should advisors tell people? Well, if they were acting really professionally, they should question the assumptions that made the actor supposedly put all their money in one kind of investment. And many of the financial advisors did, but usually they didn’t. They didn’t question the actor. They assumed that the actor, who had put, supposedly, all of the investments in money market funds, was someone who was very risk averse, or thought that was the right thing to do. And they didn’t want to challenge them, so they would walk out of there with maybe a slightly different mix of money market funds. And somebody else who was in a very risky portfolio, they didn’t challenge them.

And they even sent actors in with almost all of their portfolio in their own company’s stock, all right? Now if you work for Ford Motor Company–I noticed my uncle–I had conversations with him about this–who worked for Ford Motor Company and put all of his life savings in Ford Motor Company. I said, Uncle Ralph, you shouldn’t do that. Because it’s your job and all of your life savings. What if something happened to Ford Motor Company? Fortunately, he didn’t work for GM, which became worthless recently. But it can happen. You know, Ford could be completely wiped out. That’s your life savings. And you know what he said to me? He said, you know, I’ve worked at Ford all my life. They treat me well; I believe in them, I’m not going to sell. So, there’s lots of people like that. So, when they show up at a financial advisor, the first thing that they should do, the financial advisor should tell them, get out of your Ford stock. That’s just too risky. But only 40% of the financial advisors did that. The 60% left them mostly in their own company stock.

Why did they do that? Well, Mullainathan thought, it’s because the advisors know there’s cognitive dissonance, and they’re afraid to drive away a new client. Maybe they’ll gradually do it over a while, but you just don’t challenge their deep beliefs, whatever they say is true. And so, they’re kind of yes-men. Not all of them, and maybe they’ll come around.

It relates then, again, to a moral dilemma. If you are a financial advisor working in private practice, what do you do with people who come to you, if you know from experience that challenging their deep-seated beliefs will drive them away? So, in the real world, this is again–I’m not sure that these financial advisors are doing the wrong thing. If they would eventually tilt them toward a more responsible portfolio, they can’t drive them away.

I have a lot of–so many. Let me list some of the others and move on.

What else should I talk about? Anchoring. Anchoring refers to a tendency to anchor your opinions on something that captures your attention. The famous anchoring experiment by, it was again, Kahneman and Tversky–I could almost do this experiment here in class with you if I had a wheel of fortune. A wheel of fortune is like on a game show. You spin the wheel and it comes up with a number between zero and a hundred in this particular wheel of fortune.

So, this is the experiment. They asked their subjects, how many people–it had to be something that had an answer from zero to a hundred. One of their questions was, how many nations in the world [addition: in percent] belong to the United Nations? So, they asked the question. They said, don’t answer me just yet. Think about that question. What percent of nations in the world belong to the United Nations? Then, they spun the wheel, and it came up and it showed a random number. And then, they asked people for the answer. Well, it turns out that people tended to give an answer close to the number that just came up on the wheel. This is totally irrational, right? That wheel has nothing to do with the answer. And yet people were influenced by it. So then, they would follow-up and ask them, hey, that number you gave is the same as the one that just came up on the wheel, or it’s close to it. Why did you do that? The guy would say, just coincidence. I wasn’t influenced by the wheel. Of course not. But you know they were, because statistically they proved that they were. So, anchoring means that people are attracted to–they’re affected by subconscious things. I shouldn’t say subconscious. They didn’t make a logical connection. When you face real ambiguity and you don’t know the answer and you’ve got to come up with a decision, you are swayed by the most silly and random things.

There’s a representativeness heuristic. This is also Kahneman and Tversky. And that is, that people overemphasize certain patterns that they think are representative of what they’ve seen before. So for example, certain patterns in the stock market that may be very rare and unusual. If they remember it, if it somehow attracted their attention, they begin to look for that pattern again and again. And they see it too often.

So for example, Head and Shoulders, we talked about that. That McGee, the technical analyst, he saw the Head and Shoulders pattern in the stock market. And he saw that it crashed after that. But actually, it’s pretty hard to find those; they’re kind of rare. And it’s not the right way to process data, to be looking for patterns that are representative.

And it invites manipulation. So, I’ll give you some other bad behavior. If people believe in the Head and Shoulders, if they believe that the Head and Shoulders pattern of stock price movements predicts a decline, here’s what I can do. I’ll take some thinly traded stock. I’ll get a friend. We’ll trade back and forth and we’ll influence the price to create–we’ll deliberately create a Head and Shoulders pattern, OK? And then we’ll short the stock massively, right at the time when the head and shoulders pattern would give a sell signal, right? We can make tons of money doing that. So, why don’t we do that, right? Well, we don’t because it’s a manipulation.

[SIDE CONVERSATION]

Professor Robert Shiller: I want to then just conclude with social contagion, because it’s so important. This is my last–and this is really social psychology. I’m running out of room here. That’s social contagion.

Social psychology reflects on the fact that people are interdependent, and what I think is affected by what other think. There’s something called herd behavior. That’s a popular term. It refers to the tendency for people to move with the herd, not consciously. They don’t think that they’re moving with the herd. I might bring up a little sociology here and I’ll use a term. Everything has been psychology, but the great sociologist, one of the founders of the discipline of sociology, was the French scholar Emile Durkheim at the late 19th, early 20th century. And he used the word ”collective consciousness.” And that is, that our opinions about what’s happening are formed by a collective understanding of what’s going on. We have a tendency to think of ourselves as rational and common–all of our views come from common sense processing of facts. I have a sense of belief about what goes on in the world, but I underappreciate the extent to which my views are a little bit arbitrary and shared by millions of other people. You live at a certain point in time in history, and there are certain kinds of facts and ideas and anecdotes that are circulating. There’s another term, this is a zeitgeist. That’s German, but it’s now English. That means “spirit of the times.”

So, what Durkheim and other sociologists allowed us to understand is, that the zeitgeist is determined by a collective memory, a collective set of facts that we operate on. This herd behavior creates big swings in the stock market and other things. So, it has a huge financial impact.

But anyway, I’ve listed a number of Behavioral Finance principles that really come from psychology, and I’ve talked about some tests or examples of their proof of their importance in finance.

11.7 Moral Judgment in the Business World

But what do we conclude from this? I think that my conclusion is, that we are evolving toward better and better financial institutions. There is a lot of manipulation and exploitation, but we, as a society, have outlawed a lot of it. For example, I mentioned doing a stock market manipulation trick to create a Head and Shoulders pattern. That is an offense. It will get you in jail for doing that. And we prosecute that now. So, you can’t do that. I’m going to talk more about this in the next lecture about regulation. But it’s also people’s moral judgments that the people who evolve to become important in finance are people who have an internal compass, a desire for praise-worthiness that eliminates–I’m going to give just two examples of some recent articles about this. In the current issue of the Harvard Business Review that, I assume, is still on newsstands. This is Harvard Business Review. There’s an article by Michael Porter and co-author Mark Kramer, Porter is a well-known professor at Harvard, in which he argues that we’re coming to realize more and more about a principle called–he calls it ”shared value.” Or they call it ”shared value.” And that is that the manager of a company shouldn’t be underestimating the importance of shared value creation with society, with other people. That is, we’re all in this together, and if we’re mature, we recognize, for example, that I don’t want to be exploitative. I don’t want to make the local people in my town upset with our company. I don’t want our labor force to become disenchanted.

Now, what he’s saying it’s not really about morals exactly. It’s more about long-term value. But I guess morals somehow creeps into the same judgment. That mature businesspeople see shared value and that there was maybe not enough emphasis on that. Financial theory was leading us too much toward thinking that a manager should be selfishly pursuing a narrow focus, like maximizing the short-run value of their shares.

Anyway, the other example I have, which is also recent, not quite as recent as that, is a book that came out last year by Anna Bernasek, who is actually a journalist, not an academic. But it’s called The Economics of Integrity. Is that the title exactly? Yes. [The] Economics of Integrity. And her point in that book is that, a sense of personal integrity has dominated what people do in the business world much more than we thought recently. There has been too much disregard of the fact that people do things because they’re right.

She gives an example in the book–and I’ll close with this concept. She said, let’s consider milk, OK? Now, you drink milk regularly, I hope. It’s good for you. But it could poison you. People used to get sick from drinking contaminated milk. And you don’t ever hear of anyone getting sick. So she said, why is that? Well, we have government regulation of milk production and there are laws about purity of milk. But she looked into it and found that–actually, she didn’t think it was mostly the regulation. She thought that you are safe drinking milk because of the integrity of our people, mostly. That if you go out to some milk company and talk to the employees, they might not generally even know about the regulations. But if you ask them, they’ll tell you–I mean, are you careful to keep this milk clean? They’ll tell you, well, someone’s going to drink this, so obviously, it’s common sense, I’ll keep it clean. And what she says, it’s not primarily the regulation; it’s the integrity of the people that makes the economic system work as well as it has.

So, anyway, I’ve emphasized both sides. I’ve talked about human failings and about people exploiting these failings, about people with antisocial personalities. But we have a system that somehow eliminates this from being the major factor in our markets.

• Shiller, Finance and the Good Society, Ch. 3

Read Time: 10 Minutes

The Practical Guide to Behavioral Finance: How Real Clients Make Decisions

Financial markets aren’t filled with perfectly rational actors. Even professional investors, who make their living conducting investment research, see a persistent gap between real and reported returns .

But, Morningstar researchers argue, rational behavior goes deeper than dollars and cents.

Traditional finance theory would argue that the rational choice stands to make the most profit. But real investors face complex emotions and decisions about money. They don’t always optimize. They feel uncertainty, fear, and greed.

Behavioral finance digs into the psychological reasons behind why we spend, save, and invest the way we do. In this guide, we walk advisors through actionable tactics based on Morningstar research.

Our behavioral finance team studies how people make decisions about risk, money, and investing. With a better understanding of human behavior, investors can make better choices, and advisors can help clients reach their goals.

Key Takeaways

• As a financial advisor, behavioral coaching is one of the most valuable things you can do for clients.
• Heuristics are psychological tendencies that often positively affect our decision-making processes. When these shortcuts lead to the wrong conclusions, they become cognitive biases.
• Behavioral nudges can help clients make progress toward their financial goals.

Table of Contents

What is behavioral finance?

Do clients value behavioral coaching?

What are behavioral finance biases?

Why investors act on limited data.

How to strengthen client relationships.

Regulating client emotions.

What Is Behavioral Finance?

When you think about behavioral finance, behavioral biases might come to mind first. You might think of herding behavior and the chaos of meme stocks and Silicon Valley Bank’s demise. Or you may think of the recency bias and how people lost money in 2020 by cashing out at the market lows.

While biases factor into behavioral finance, the field goes beyond cataloging mental shortcuts.

Behavioral finance is the study of how real people make real decisions about money in real environments—all of which are imperfect. In recent years, behavioral scientists have doubled down on making research findings practical and useful.

For financial advisors and investors, this is good news: It means more actionable insights to help guide investment decisions.

Free Download Library

Uncovering Your Real Goals

Behavioral coaching pocket guide, what motivates clients to stay with their financial advisors, how do investors prepare for a recession, why clients hire their advisors, why clients fire their advisors, why money is important to investors, common mistakes advisors make, do clients value financial coaching our research says yes.

The phrase “ behavioral coaching ” might sound judgmental. Clients may not want to be painted as incompetent or incapable of controlling their emotions. Morningstar research shows that, on average, clients undervalue emotional support from their advisors.

This contradicts the value that financial advisors offer through their services. Vanguard found that behavioral coaching is the most influential thing an advisor can do— adding 150 basis points on average . As passive funds and robo-advisors multiply, this personal touch can set you apart from the competition.

Luckily, investor appetite for emotional support from their advisors may be heartier than it seems.

One recent study showed that investors often seek advisors to address specific financial needs, which might be expected. Our research also found more emotional factors can contribute to hiring decisions.

The disconnect in our findings may stem from how advisors market their services.

In the early stages, prospects might feel reluctant to talk about their feelings—especially if those feelings make them feel powerless. But they might be interested in your work as a sounding board or a source of peace of mind.

In other words? Behavioral coaching.

Back to top.

Why People Hire Financial Advisors

Related Products and Services

Advisor Workstation

Wealth platform, morningstar office℠.

Key takeaway

Hidden biases can affect many of our financial decisions, even long-term goals.

Morningstar’s three-step process can help you guide investors to more meaningful, deeper goals.

What Are Behavioral Finance Biases? Why Do They Matter for Financial Planning?

Each day, investors face hundreds of decisions, large and small, about how to use their money. Do they pay down their debts or invest in real estate? Should they put their savings in an IRA or a rainy-day fund? Is a hot new stock an opportunity or a fad?

Heuristics are a common thought process, like a mental shortcut, that can help us make decisions. Often these shortcuts have positive outcomes. They help us react quickly and make sense of new information.

However, sometimes these shortcuts can lead us to the wrong conclusions. When that happens, those helpful shortcuts become cognitive biases.

Hidden biases can affect many of our financial decisions, even long-term goals. Effective financial planning depends on setting meaningful client goals. When people can commit to a goal, they’re more likely to work toward it successfully.

But asking clients about their goals might not yield the best answers. Research shows that behavioral biases could influence these statements and obscure the most important goals.

Investors might respond with something easy to recall, based on an article we read or a conversation we had (recency bias). Investors also tend to overweight immediate rewards, like short-term purchases, over the promise of future satisfaction (hyperbolic discounting). Both tendencies can get in the way of an effective financial plan.

Failure to understand investors can have consequences.

Why investors fire their advisors

In a Morningstar study of why clients fire their advisors, investors cited a variety of reasons—cost, return performance, and relationships. One reason investors said they had fired their advisors for was when their advisor failed to understand their individual needs and goals.

With more time, attention, and resources to understand the client, advisors could have remedied these complaints. Morningstar researchers created a three-step process to guide investors through understanding their overarching long-term aspirations.

Mining for Goals

Why investors act on limited data.

Today’s investors must choose from an overwhelming variety of investment types —cryptocurrency, structured products, and ESG-themed funds. Even savvy investors might only be comfortable with a small slice of this vast landscape.

Our brains are wired to help us act on incomplete information. In our messy, complex world, it’s impossible to know every cost and benefit associated with every decision. Most of the time, heuristics help us make adequate decisions. But sometimes these shortcuts don’t serve us well, which is when they become cognitive biases.

Our brains don’t treat all information equally. The most reliable information doesn’t always get the most weight. Instead, we tend to place more weight on information that readily comes to mind (availability bias). We may also seek out and put greater importance on information that speaks to an existing belief (confirmation bias).

Unfortunately, recognizing your cognitive biases doesn't always reduce your reliance on them—even for experts. Here’s how you can combat biases when investors are seeking information:

• Slow down. People often rely on automated ways of thinking to make quick decisions.
• Play devil’s advocate. When investors call with a plan they want to pursue, list both the reasons why it could succeed and potential drawbacks.
• Encourage your clients to reach out. Remind clients that they can trust you for honest feedback.

With a foundation of goals-based planning, you can help clients stay on track to what matters most. In Morningstar Advisor Workstation, you can connect goals to investment plans that drive investor success.

To understand an investor, advisors must begin by helping the investor understand themselves.

In our research, investors consistently cite an advisor acting in their best interest as a top source of trust.

How to Apply Behavioral Finance for Stronger Client Relationships

Many financial advisors wait for a financial crisis to dedicate time to their client relationships—only then do they play the role of financial counselor or coach by helping clients manage their emotions.

At this point, it might be too late.

Research shows that lost returns are among the top reasons advisors get fired. In other words, unless you’ve done your prep work, once markets go awry, your client relationships may already be suffering.

Advisors can strengthen client relationships in two ways, based on Morningstar research.

Build understanding

To understand an investor, advisors must begin by helping the investor understand themselves. Advisors must help investors discover their own needs and goals , to an extent.

Ask good questions and then listen . This sounds simple, but it isn’t.

• There are many promising icebreaker questions at advisors’ disposal. Regardless of which you use, pay attention to how this question affects your client’s mindset.
• Remember, the client should be talking most of the time. Let them fill the silence.

The investor preferences tool in Advisor Workstation can help you plan client conversations so you know when and where to go deeper. The survey tracks not just want clients care about, but how much, so you know what to prioritize.

Build trust

When it comes to trust, both parties accept vulnerability because they believe in the intentions and behavior of the other. To develop trust with a client, start by putting those intentions and behaviors on display. There’s still an element of understanding here, but this time, the investor must understand you.

In our research, investors consistently cite an advisor acting in their best interest as a top source of trust . Unfortunately, many clients may not have a good idea what the term ‘best interest’ means.

Discuss your commitment to the best-interest standard by defining what it means for your relationship with the client and their money. A few possible topics to address:

• How do you get paid?
• What happens if the client accepts your recommendation?
• A breakdown of any costs and fees.
• How often will you monitor their investments?
• How often will you meet with the client?

Key Takeaway

Remind clients that they’re not alone in feeling swayed by market ups and downs, but return-chasing can be costly.

Help clients set their plan and forget it to remain on track.

Regulating Client Emotions in Market Roller-Coasters

Many clients may know the general rule of investing—Buy low, sell high—but may have had trouble abiding by it in the past. Maybe they felt the urge to jump in on the action during the GameStop run in 2022 or to pull money from investments in the early COVID-19 market panic.

When working with clients, it’s important to remind them that they’re not alone in feeling swayed by market ups and downs, but these decisions can be costly. Return-chasing—investing more in an asset when returns grow and investing less when they shrink—has been found to reduce the returns an investor sees compared to those who didn’t chase returns.

We’re so easily swayed by market fluctuations because we’re social creatures. Our tendency to pay attention to and learn from others has allowed humans to do incredible things, but it can also lead us astray.

Herding behavior describes how we feel compelled to act in a way that aligns with what others are doing, for good or ill. When things are on the way up, herding behavior undergirds FOMO. When things are on the way down, it encourages panic selling.

Other cognitive biases can further encourage return-chasing. For example:

• When we see a stock enjoy a meteoric rise, we might assume the stock will continue to do well and overlook other factors due to our tendency to focus on recent events (availability heuristic).
• We may counterproductively decide to sell holdings when they’re down because of the acute sense of pain we feel to lose money due to loss aversion.

Though it can be hard to resist the crowd, a few behavioral guardrails can help investors stay the course during volatility:

1. Reflect on goals. Well-articulated, meaningful goals help people stay motivated and committed to their plans. Using relevant tools, you can help your client set the right goals and then stick to them when they feel the pull of the crowd.

2. Set it and forget it. Help your clients automate investing as much as possible. It can be hard to make the ‘right’ investing decision during volatility. By automating, the client will not have to make that decision at all—it’ll already be made for them.

3. Know when to step away. Constantly watching what others are doing can spike the desire to go with the herd. Help your client set limits to reduce this pressure. This could mean lockout timers on apps, only reading market news once a week, or cutting down on how often they check their portfolio.

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CORPFIN 7051 - Behavioural Finance: Theory and Applications

North terrace campus - semester 1 - 2018, course details, course staff.

Course Coordinator: Dr Chia-Feng (Jeffrey) Yu

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On successful completion of this course, students will be able to: 1. Apply analytical skills for financial decision making. 2. Conduct a relative valuation for financial investments. 3. Identify the behavioural bias and psychological characteristics of investors. 4. Develop strategies to manage wealth effectively and wisely from mispriced assets. 5. Practice discussion of capital markets and how we can apply what we learn in class to the financial world.

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Demystifying the Difficult: 18 Common Issues Students Encounter in Behavioral Finance Assignment Writing

The fascinating field of behavioural finance combines concepts from psychology and finance to comprehend how people and groups make decisions in the financial markets. While writing assignments on this topic can be difficult for students, studying behavioural finance is necessary for those who want to work in the finance industry. In this blog from finance assignment help , we'll talk about the 18 typical issues that students run into when working on challenging behavioural finance assignments. These difficulties include everything from comprehending difficult ideas like prospect theory and biases to examining behavioural patterns and using mathematical models. Additionally, students might have trouble identifying pertinent case studies, managing time constraints, and getting past writer's block. It can be challenging to formulate a compelling thesis statement, comprehend appropriate jargon, and connect theory to practical examples. Additionally, students might encounter difficulties with data collection and analysis, formatting and citations, and plagiarism avoidance. Overcoming these challenges requires asking for help, editing and proofreading your work, as well as self-reflection for ongoing learning. Students can improve their writing abilities, gain a deeper understanding of Behavioral Finance Assignments , and succeed in their academic endeavours by addressing these common issues.

Understanding the Complex Concepts

Students are frequently expected to understand complex ideas like prospect theory, heuristics, and biases for behavioural finance assignments. It can be challenging for many students to comprehend these theories and use them in practical situations. To solve this issue, students should begin by reading case studies, academic articles, and textbooks to build a strong foundation in behavioural finance ideas. Attending lectures and participating in class discussions can also offer insightful information and clear up any misunderstandings. To better understand complex concepts, ask your professors or teaching assistants for clarification. It's crucial to divide these ideas into manageable chunks before gradually developing a thorough understanding. Comprehension can be further improved by doing independent study, joining study groups, and actively participating in problem-solving activities. Examining case studies and real-world examples that use these ideas can also help with comprehension and offer useful insights. Overall, students can overcome the difficulties of comprehending complex behavioural finance concepts with commitment and consistent effort.

Lack of Research

The limited availability of research materials presents a significant obstacle to writing behavioural finance assignments. Behavioural finance is a relatively new field compared to traditional finance topics, so comprehensive resources might be scarce. Students must take extra time to look up pertinent academic books, papers, and articles to bolster their claims. They ought to consult academic encyclopaedias, online libraries, and reputable finance journals with a focus on behavioural finance. Additionally, seeking advice from professors or subject-matter specialists can help you identify reliable sources. In order to ensure the reliability of the research material, it is essential to critically assess its quality and relevance. When primary research is constrained, students can investigate alternative strategies like meta-analyses or systematic reviews that compile prior research. Students may also think about conducting their own limited research studies, surveys, or interviews to support the work of others. Students can get around the problem of having little research material for behavioural finance assignments by being proactive in their research efforts and looking into a variety of sources.

Analyzing Behavioral Patterns

Students are frequently required to analyse and interpret intricate behavioural patterns in financial decision-making for behavioural finance assignments. Understanding human emotions, prejudices, and cognitive processes can be difficult. By studying real-world case studies, conducting surveys, and observing market behaviours to gain insights into various behavioural patterns, students can get past this obstacle. Understanding these patterns can be made easier by reading pertinent articles and conducting research on behavioural finance. Students can locate recurrent behavioural patterns and anomalies in financial markets by looking at historical data. To interpret these patterns effectively, it is essential to cultivate analytical abilities and use the proper frameworks and models. Working together with classmates or taking part in group discussions can provide fresh viewpoints and enhance the analysis process. Additionally, getting advice from professors or mentors with knowledge of behavioural finance can offer insightful details and help hone analytical methods. Students can master the analysis and interpretation of behavioural finance phenomena with practice and exposure to a variety of behavioural patterns.

Applying Mathematical Models

Using mathematical models to explain and predict behavioural phenomena is sometimes required for behavioural finance assignments. For students who have trouble with quantitative analysis, this may be intimidating. Students can get around this issue by asking their professors for help or by using online tutorials on topics like regression analysis, probability theory, and statistical inference. Applying these models correctly requires an understanding of the underlying mathematics. The necessary mathematical methods and concepts should be studied and practised by students. Applying mathematical models more proficiently can be attained by working through problem sets, using online resources, and asking questions when stuck. Working together with peers can also offer chances for peer learning and sharing knowledge about using mathematical models in behavioural finance. In addition, using spreadsheets or statistical software can speed up calculations and help with the use of mathematical models. laying a solid foundation in

Incorporating Empirical Evidence

Students must provide empirical support for their claims in behavioural finance assignments. This presents a problem because original experiments and surveys can be time- and resource-intensive to conduct, and behavioural finance research is still in its infancy. By using published research, industry reports, and behavioural economists' experiments, students can lessen this issue. To find pertinent studies that relate to the subject of their assignment, they should search academic databases and reliable sources. To ensure the validity of the research, it is crucial to critically assess the methodology, sample size, and findings. In order to provide a thorough overview of the research in a particular area, meta-analyses and systematic reviews that gather and analyse multiple studies can also be used by students. Analysing the research results and making connections to the claims made in the assignment is crucial. Students can bolster their arguments and show a thorough understanding of behavioural finance principles by incorporating empirical evidence from dependable sources.

Identifying Relevant Case Studies

Understanding and analysing behavioural finance concepts relies heavily on case studies. Finding case studies that are pertinent to the assignment's subject, however, can be difficult. Students should look for behavioural finance case studies that are relevant to their assignment in scholarly journals, business magazines, and online resources. Additionally, they can refer to books and academic articles that highlight particular behavioural finance case studies. Students should take into account variables like relevance, the accuracy of the data, and the level of analysis when choosing case studies. Deconstructing and analysing the case studies can offer important insights into how behavioural finance ideas are applied in practical situations. Students can also use these case studies to back up their claims, clarify important ideas, and give real-world examples. Discussions with classmates or professors can help you find additional case studies or viewpoints that improve the assignment's overall quality.

Managing Time Constraints

Assignments in behavioural finance frequently call for in-depth research, data analysis, and critical thinking. Time constraints may result from juggling these tasks with other academic and personal obligations. Students should make a thorough study plan, set aside specific times for research, writing, and proofreading, and ask for assistance from peers or tutors as needed to get around this issue. Effective time management can be achieved by segmenting the assignment into smaller tasks and establishing reasonable completion dates for each phase. Focus and productivity can be improved by using productivity tools and strategies like time blocking and the Pomodoro Technique. To ensure effective time management, it is critical to prioritise tasks based on their importance and completion date. When faced with difficulties or time constraints, asking for help from peers or professors can offer invaluable support and direction. Students can make sure they have enough time for in-depth research, thoughtful analysis, and high-quality writing by efficiently managing their time and asking for assistance when necessary.

Overcoming Writer's Block

Students frequently experience writer's block when working on any kind of assignment, and behavioural finance papers are no exception. To overcome this difficulty, students should divide the assignment into manageable chunks, organise their ideas before writing, and take quick mental breaks. Building momentum and overcoming writer's block can be achieved by starting with simpler sections or topics. Using brainstorming techniques like mind mapping or freewriting can help you come up with ideas and get over your writing's initial obstacles. Getting input from professors or peers can also open your eyes to new ideas and encourage creativity. It's crucial to keep in mind that revisions can be made after the initial draught, so it's not necessary for it to be flawless. Stress can be reduced and a more productive mindset can be facilitated by having realistic expectations and being kind to oneself while writing. Students can maintain a steady writing flow and produce well-structured behavioural finance assignments by adopting techniques to get over writer's block and asking for assistance when necessary.

Developing a Strong Thesis Statement

Every assignment needs a clear, concise thesis statement. However, given the complexity and interdisciplinary nature of behavioural finance, developing a compelling thesis statement can be difficult. To make sure their thesis statements adequately capture the essence of their assignment, students should spend time coming up with ideas, conducting research, and revising them. They should be able to point out the paper's main thesis or goal with clarity and then articulate it in a focused, cogent manner. Students can improve their thesis statements and make sure they offer something original to the field of behavioural finance by conducting in-depth background research and critically evaluating existing literature. Getting input from professors or peers can also offer insightful comments and help the thesis statement be strengthened. Students lay a solid foundation for their assignment, direct their research and analysis, and guarantee a coherent and logical flow of ideas throughout the paper by creating a strong thesis statement.

Understanding and Using Proper Terminology

Students may initially be unfamiliar with the terminology used in behavioural finance because it has its own set of terms. Understanding and proper use of these terms are essential for the assignment. To learn the proper terminology, students can compile a glossary of behavioural finance terms, refer to textbooks and online resources, and ask their professors for advice. They should be aware of the precise definitions and usage contexts of these terms. The credibility of the assignment is increased by proper terminology use, which shows a deep understanding of the subject. Students should also avoid using ambiguous or incorrect terminology in order to write with clarity and precision. Students can improve their ability to use the language of the field by regularly applying behavioural finance terminology in writing and discussions. Students can effectively communicate their ideas and concepts in their behavioural finance assignments by developing a solid understanding of the terminology.

Integrating Theory with Real-Life Examples

Assignments in behavioural finance frequently call for students to relate abstract ideas to practical applications. This can be difficult because it necessitates a thorough comprehension of both the theoretical underpinnings and actual application. Students can get past this difficulty by researching pertinent examples to back up their claims through case studies, financial news, and historical market events. Students can improve their comprehension of behavioural finance concepts and applications by investigating how behavioural biases and heuristics appear in practical situations. They should make an effort to offer specific and relatable examples that highlight how behavioural factors affect financial decision-making. Additionally, students can use recent studies and literature to find empirical data and case studies that relate to the subject of their assignment. The application of behavioural finance in the real world is demonstrated, and the assignment's overall quality is raised, by fusing theory with practical examples.

Overcoming Cognitive Biases

Students may experience cognitive biases during their study of behavioural finance, which may impair their objectivity and ability to think critically. Writing a fair and well-organized assignment requires recognising and overcoming biases like availability bias and confirmation bias. To combat cognitive biases, students should actively challenge their beliefs, look for opposing points of view, and weigh possible counterarguments. Self-awareness and reflective thinking can help you recognise your own biases and give you the power to make deliberate decisions. Getting input from peers or professors can also offer insightful information and diverse viewpoints that help reduce bias. Additionally, keeping abreast of new developments and research in behavioural finance can help students understand concepts better and challenge preconceived notions. Students can create objective behavioural finance assignments that advance knowledge and understanding in the field by consciously pursuing objectivity and critically evaluating information.

Data Collection and Analysis

Collecting and analysing data is a common task in behavioural finance assignments in order to make arguments and reach conclusions. Finding relevant data and using the right statistical methods may be difficult for students. They can get around this by using online financial databases, conducting surveys, or enlisting the aid of data analysis professionals. A wealth of data on market trends, stock prices, and economic indicators can be found in online financial databases like Bloomberg or Yahoo Finance, which can be used to study behavioural finance phenomena. In addition, students can create and run surveys to collect primary data relevant to their research goals. Students can apply advanced statistical techniques to analyse and interpret their data effectively by seeking assistance from professionals in data analysis, such as statisticians or econometricians. Students can provide strong evidence to back up their claims and improve the overall quality of their behavioural finance assignments by devoting time to data collection and analysis.

Formatting and Citations

Every academic assignment needs proper formatting and accurate citations. In behavioural finance papers, it may be difficult for students to follow specific formatting guidelines (such as APA or MLA) and correctly cite their sources. Students can get past this barrier by consulting style manuals, using citation management software, and getting advice from professors or writing centres. Formatting, citation, and referencing guidelines are provided in-depth in style manuals like the APA Publication Manual and the MLA Handbook. Students should ensure consistency throughout their assignments by becoming familiar with the unique requirements of their academic institution. Students can manage their references effectively and the citation process can be streamlined by using citation management software like Zotero or EndNote. Students can meet the necessary academic standards and preserve the integrity of their behavioural finance assignments by seeking guidance from professors or writing centres to allay any formatting or citation questions.

Avoiding Plagiarism

Plagiarism in academic writing is a serious offence. While incorporating ideas and concepts from various sources, students must exercise caution to prevent accidental plagiarism. Students can preserve academic integrity and avert potential repercussions by properly citing all references, summarising data, and using plagiarism detection tools. The diligent attribution of concepts, hypotheses, and facts to their original sources through in-text citations and an extensive reference list is expected of all students. In order to present ideas in one's own words while still referencing the original author, it is often more effective to paraphrase information as opposed to directly copying and pasting text. Before submitting an assignment, it is possible to check it for any potential instances of plagiarism using plagiarism detection tools like Turnitin or Grammarly. Students uphold academic integrity and show their capacity for independent research and critical thinking in their behavioural finance assignments by following moral standards and giving credit where it is due.

Seeking Assistance

Students should not be afraid to ask for help when they are struggling with a challenging behavioural finance assignment. Professors, teaching assistants, or online tutoring services can offer advice, dispel confusion, and share insightful information. Peer collaboration can help create a supportive learning environment where students can share ideas and work together to solve problems. The field of behavioural finance is well-versed in by professors and teaching assistants, who can offer detailed advice on assignment specifications, research methodologies, or content clarification. Online tutoring services give students easy access to subject matter specialists who can offer specialised help based on their needs. Students can discuss difficult concepts, share their perspectives, and brainstorm ideas by participating in discussions and study groups with their peers. By asking for help, students can overcome challenges more successfully, understand behavioural finance better, and create excellent assignments that highlight their knowledge and analytical abilities.

Proofreading and Editing

A perfect assignment requires meticulous editing and proofreading. Grammatical mistakes, typos, and structural inconsistencies are frequently ignored by students. To address this, students should set aside enough time for proofreading, use grammar and spell-check tools, and think about asking their peers for feedback or hiring professional editors to enhance the quality of their assignments as a whole. Examining the assignment for grammatical, punctuation, and awkward phrasing errors is known as proofreading. Common errors can be found and fixed by using grammar and spell-checking software, such as Grammarly or the spell-check function in Microsoft Word. Additionally, getting feedback from peers or organising study groups where papers are traded and discussed can open up new perspectives and point out areas that need work. To ensure their assignment meets the highest standards of clarity, coherence, and academic integrity, students can think about using editing services or hiring professional editors. Students can improve the readability and professionalism of their behavioural finance assignments by setting aside time for proofreading and editing.

Self-Reflection and Continuous Learning

Since behavioural finance is a constantly evolving field, learning never stops after an assignment is turned in. Students should reflect on themselves, assess their strengths and weaknesses, and pinpoint areas where they can improve. Students can overcome obstacles and gain a deeper understanding of behavioural finance concepts by adopting a growth mindset and constantly seeking out new information. In order to grow personally, one must critically evaluate their performance, identify any knowledge or skill gaps, and set goals for improvement. The process of self-assessment enables students to recognise their strengths and weaknesses, which in turn informs their future learning strategies. Students can ask themselves questions like, "What did I learn from this assignment?" or "What could I have done better?" By reading scholarly journals, participating in seminars or webinars, and having conversations with behavioural finance experts, students can stay current on the most recent findings and advancements while fostering a culture of continuous learning. Students can excel in their behavioural finance assignments and lay a solid foundation for their future careers in finance by adopting a mindset of lifelong learning.

Students may find it difficult to write a challenging behavioural finance assignment, but with the right strategy and materials, it can be completed. Students can successfully negotiate the complexities of behavioural finance assignments by comprehending the common difficulties, using practical solutions, asking for help when necessary, and keeping a positive outlook. To master this fascinating field and produce exceptional work, keep in mind that persistence and dedication are essential. Students can improve their writing abilities, expand their understanding of behavioural finance, and succeed in their academic endeavours by addressing the 18 common issues covered in this blog. With time and practice, students will become more comfortable handling challenging behavioural finance assignments, allowing them to confidently apply behavioural finance principles in real-world scenarios. The road may not always be smooth, but students can overcome these difficulties and master this fascinating nexus of psychology and finance by accepting the learning process and relentlessly seeking improvement. So, maintain your resolve and focus while taking advantage of the opportunities for both personal and professional growth that behavioural finance assignments present.

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Guides & Reports

The Ultimate Guide to Applying Behavioural Finance in Financial Advice

Behavioural finance addresses the imbalance in attention between what financial advice is for and whom it is for. To apply behavioural finance effectively requires understanding how investors own investments, not merely what they own. Done well, this can lead to comfortable and confident investors, and better financial outcomes.

What is behavioural finance?

What’s the difference between behavioural finance and behavioural economics, what are the benefits of applying behavioural finance in financial advice, what are the barriers to applying behavioural finance in financial advice, what mistakes do wealth managers make when applying behavioural finance in their businesses.

• How should investors’ behavioural traits and tendencies be assessed?

What do the regulations say about applying behavioural finance in financial advice?

How can behavioural finance improve access to financial advice.

• How can Oxford Risk’s behavioural suitability tools help you?

Behavioural finance has become a catch-all term for several topics, from attempts to explain anomalies in stock-price fluctuations at the macro level, to individual investor behaviour at the micro level.

In the context of financial advice, an exact definition of behavioural finance matters far less than the practical application of the techniques, and the core principles they’re based on.

Behavioural finance is built on the understanding that investors are humans, and that far from money causing humans to act like robots, money is one of the most emotional topics there is, thereby rendering most classical approaches to finance redundant, if not dangerous.

Behavioural finance makes finance more relevant to real-life. It bridges the gap between the mathematically optimal model village of the textbook and the more practicable, but more psychologically complex world where humans live, in all their haphazard glory.

Applying behavioural finance to real-life decision-making systems is about blending the best of both worlds. It’s about using ‘decision prosthetics’: tools that help guide humans towards a better, engaged, decision, not make it for them. It’s about providing tools to make both advisers and clients more consistently the best versions of themselves and overcome behavioural costs of being human . It’s about making these tools as integral to the investment process as an artificial limb to its host: better built-in than bolted on.

While it’s good that behavioural finance is being talked about, talk is cheap, and suitability failures based on cheap talk can be extremely expensive. Investor management is often just as, if not more, important than investment management. The consequences of lessons learned, or mistakes avoided, can compound even more dramatically than financial returns. Learn more about measuring both investments and investors in our blog here.

Behavioural finance is about looking beyond a narrow product-centric view of the investment world. It’s about recognising that investment-management solutions to behavioural ‘problems’ – which in effect bake behaviours into the long-term risk level of a portfolio – are usually an unnecessarily costly way to provide an investor with comfort, relative to investor-management ones of tweaking decision-making and communication frameworks.

For the purposes of improving financial advice, it doesn’t matter.

Anything that researches, and acts to improve how individuals experience their investing journey is welcome; the label doesn’t matter.

In short, better investor outcomes: not merely better returns, but better returns relative to the individual anxieties experienced along the way.

Just as there is no one-size-fits-all ‘best’ investment, there isn’t an objectively ‘best’ way to report on those investments, a ‘best’ way talk to clients in turbulent markets, or ‘best’ way to structure an investment decision-making process. Knowing the ‘best’ way for each client requires knowing that client in a dynamic, multi-dimensional, contextually sensitive way: a behaviourally conscious way.

The advice industry exists to help investors make wiser choices, by matching them to investments that are suitable for them, given their current and expected future financial situations, their goals, and their financial personalities.

Advice is suitable when it makes (and can evidence!) a good match, and unsuitable when it doesn’t (and cannot).

Behavioural finance is a way of better understanding investors – both their preferences, and their likely reactions to changes in internal or external situations – in a way that improves this match-making process throughout the investing journey. See this post as an example of how a more behaviourally conscious approach could (or could not) lead to a change in the risk level of a portfolio because of a change in market values.

A suitability process rests on:

• accurately assessing each investor’s willingness and ability (both financial and emotional ability) to take investment risk;
• a robust methodology for combining that willingness and ability;
• measuring that overall investor risk in way that matches what is important to investors’ long-term needs; and
• doing so in a way that can be objectively and consistently matched to the risk measurements of available investments.

Classical approaches ignore most of this, by taking a product-centric, rather than a human-centric view of retail investing. This has led to a focus on suitability at point of sale, not suitability of ownership. For example, subjecting clients to an often off-puttingly onerous (and therefore counterproductive) up-front ‘know your client’ process, and then acting as if people become machines when they start to own investments.

Yet investing is a long-term, lifestyle-centric, journey, not a short-term product-centric event.

A point-of-sale focus that fails to consider the behavioural aspects of the journey isn’t suitability for humans, it’s suitability for Zombies – something that looks like a human, but has no internal conscious experience, and just mindlessly pursues brains (or in this case financial returns!). Moreover, as we explain in 'A Wealth Manager’s Guide to Investor Cash Deployment' , effective consideration of the investor's journey is also a great way to encourage people to move surplus cash off the sidelines and into the markets. People sit on mountains of cash not because it is secure, but because it feels secure in the moment. A behaviourally conscious approach to helping people get invested recognises and works with this understanding.

The most common reasons a more behaviourally conscious approach is overlooked or applied inadequately are based on three main beliefs:

• Believing that if it can’t be measured, it doesn’t matter – This leads to downplaying, or ignoring behavioural approaches altogether. It’s very easy to measure financial returns. It’s practically impossible to measure how someone felt about the journey towards those returns, or even the long-term financial consequences of poor short-term decisions not taken because of a well-timed behavioural intervention.
• Believing that meeting the letter of the law is more important than meeting the spirit – Regulations cannot be too prescriptive. However, leaving something open to interpretation (e.g. ‘consider Risk Tolerance’) is to leave it open to misapplication (e.g. asking an investor to self-assess their Risk Tolerance). The spirit of the compliance rules is to understand an investor, not to give the appearance of having done so.
• Believing that bolted-on is as good as built-in – Behavioural techniques are often an afterthought. A process is designed, and then individual ‘biases’ are considered, and standalone measures taken to ‘combat’ them. This can work in certain limited ways, but it’s treating the disease, rather than the patient. Assessing an overall financial personality should be seen not as a nice-to-have addition to a Risk Tolerance score; rather Risk Tolerance should be seen as one component of an overall financial personality.

Mistakes applying behavioural finance to a suitability process fall into two broad categories: applying something poorly, and failing to apply anything at all.

The most fundamental ask of the suitability regulations is to assess each investor’s willingness and ability to take financial risk.

Willingness is measured by Risk Tolerance. And while this is always done, it is sadly very rarely done well. Assessments commonly use ambiguous or irrelevant questions that confuse investors, or confound Risk Tolerance with other aspects of a financial personality, such as an investor’s Composure or Confidence.

For more on this, see ‘Measuring Risk Tolerance Badly Is As Bad As Not Measuring It At All’.

Financial ability is measured by Risk Capacity. Again, this tends to be done poorly. Failures to properly quantify Risk Capacity, to measure it in a way designed to interact with Risk Tolerance, and to have a sound method for doing that combining are not strictly speaking ‘behavioural’ mistakes, though they are no less fundamental to suitability. Indeed, for most investors, Risk Capacity is a greater determinant of the right level of risk to take than Risk Tolerance.

However, assessing ‘ability’ does not – or rather should not – stop there.

In addition to this financial ability to take risk, each investor also has an emotional ability to take risk: a Behavioural Capacity that determines how best to interact with investments to ensure ongoing comfort with the risk being taken.

The most serious failing is the absence of a systematic and scientifically robust and reliable process for assessing this Behavioural Capacity. Financial ability may be assessed (somehow), but emotional ability is ignored, even though it can easily override the decision-making machinery of even the most financially able.

In addition, common hot-topics like pension transfers, ESG, and adviser ‘noise’ (unjustified inconsistencies in advice between advisers or even within the same adviser) are all hugely behavioural, yet treated as if they’re not. You can find out more about adviser ‘noise’ in our guide: Noise in Financial Advice .

How should investors' behavioural traits and tendencies be assessed?

Holistically.

The most important consideration for any assessment of a human is to see them as a whole. You can – and should – break a situation down for analysis, say into current and future assets, or different dimensions of a personality, but to be effective, these need to feed back into the vision of a whole human, not create that vision in the first place.

You can build a machine up from its component parts, but not a person.

A suitability process is more than a collection of tick-box exercises. It’s not much use measuring Risk Tolerance and Risk Capacity if those two measures don’t talk to each other. Because ultimately it’s not the individual measurements, but their interaction, that determines the suitable level of risk for an investor to take.

Similarly, behavioural traits and tendencies work as a system, not a collection of components. Delivering ‘solutions’ for one tendency, viewed in isolation, could easily be unsuitable in light of an investor’s overall psychological make-up.

The same idea applies to Knowledge and Experience assessments. To be effective in driving better decisions, and better investor outcomes, K&E assessments need to be more principles-based. Cumbersome checklists should be discouraged. They detract from the credibility of the advice process, and have the potentially perverse

consequence of implying that an investor who had not previously traded in a particular instrument should exclude that from a sensible diversified portfolio because of lack of specific experience.

In the long-run, focusing on the ‘efficient’ ticking-off of regulatory requirements in isolation serves neither institutions, nor investors. It’s not good for institutions, which have to keep revisiting their increasingly Frankensteinian processes. And it’s not good for investors, who want to understand, and to be understood, but who are left feeling uneducated and unengaged.

Scientifically

It should go without saying that tests – such as those measuring Risk Tolerance – should be tested. There is extensive academic literature evidencing how – and how not – to conduct a robust, reliable, and repeatable psychometric assessment (as well as the value of psychometric assessments over alternatives in the first place). Yet many measurement approaches are demonstrably flawed when judged against this literature.

This failure of testing also feeds into a failure of investor communication and engagement. We know, for example, that disclosure – especially in the form of bombarding an investor with upfront risk warnings – doesn’t work. It’s been proven time and again to be ineffective, or even off-putting – disengaging people when the very thing we’re trying to do is engage them. And yet it’s still the mainstay of investment ‘education’.

There are more effective measures, for example just-in-time education. This runs counter to the tendency to front-load suitability assessments, but it fits in perfectly with a more dynamic approach to suitability.

Profiling shouldn’t stop when investment starts. It should be married to, not divorced from, the ongoing client relationship, dynamically adjusting to meet changing circumstances.

It’s worth noting, with this talk of engagement, the role of ‘gamification’ techniques in assessing financial personalities. Techniques such as collecting badges signifying completion of certain tasks, the use of leaderboards, or identification with a ‘team’ are great for engagement. But when assessing a psychological trait like Risk Tolerance, gimmicky games don’t test it, they trivialise it. Form should follow function, not replace it. Never gamify at the expense of accuracy. You can read more about the judicious use of gamification in our post ‘Beware Style Over Substance in Risk Profiling’.

At their most fundamental level, the regulations exist to ensure that advisers know their clients, because if they didn’t, they wouldn’t know what was suitable for them. The mindset, insights, tools, and techniques of behavioural finance enable advisers to know their clients with a richness unknown to the traditional approaches that treat clients as if they were robots.

Learn what the European MiFID II regulation says about specifically demonstrating suitability and appropriateness of investments for clients by clicking here.

There are two sides to any set of laws: the words themselves, and the intentions (or spirit) behind them.

The spirit of financial advisory regulations is clear: to protect clients from bad investments, from unscrupulous salesmen, and from themselves. They aim to increase a client’s comfort and confidence with investing – to arm them with a greater understanding of what they’re investing in, and why.

Comfort and confidence are emotional states, triggered by internal traits colliding with external circumstances. And you don’t manage that by looking through a limited, letter-of-the-law lens.

A focus on the letter of the law can leave advisers feeling like they’re playing a constant game of catch-up. To make matters worse, a focus on the boxes to be ticked rather than the reasons the boxes exist can lead to laws being followed at the expense of meeting the very outputs the laws are there to produce.

Overlooking the spirit of the laws is easy, but dangerous, because it’s the spirit that will always be the final judge of whether a course of action is suitable or not.

Reacting to regulatory changes is less efficient than anticipating them. A focus on the spirit of the laws should ensure that regulatory requirements are met as a side-effect of following processes designed for other purposes.

For more on this, see ‘Focus on the Spirit of Risk Regulation’ and, for the specific case of the MiFID II requirements to consider sustainable-investing preferences, ‘ESG: The Compelling & The Compliant’ .

Good advice is out there, but there are barriers to getting it to investors. For example, the proliferation of inconsistent and unhelpfully technical language; behavioural barriers to seeking and understanding advice; and the pros and cons of simplified advice options.

The focus of attempts to do something about this tends to mistakenly focus on products – making them ‘simpler’, or plastering them with more informative labels.

The shortfall lies less in the availability of suitable (or even helpfully labelled) products and more in services that make it clearer and easier for investors to identify the simple set of products most suitable for their (holistic) needs. Services that help them avoid unnecessary complications, and – more importantly – help them acquire the understanding and emotional comfort to invest in and stick with those product solutions already out there.

The problem is much more one of behavioural engagement and emotional comfort than product availability – indeed there are strong arguments that broader product ranges are part of the problem, rather than the solution.

To suggest that the problem is a lack of products is to suggest that everyone with a garage full on unused gym equipment isn’t fitter because they are lacking the latest gadget, rather than because they’ve not learnt to get comfortable using the ones they already have.

For investment decisions to be effective we should always prioritise principles over products, and portfolios over investments in isolation. Product labelling, on the contrary, risks encouraging consideration and comparison of investments in isolation, potentially at the expense of the more important question of holistic portfolio suitability.

Where product labelling might be most useful is where it focusses investors on the role of the investment product in the broader portfolio context. For example, labels that help investors to consider their exposure to particular risks or concentrations (e.g. to single stocks, geographies, sectors, currencies, etc.) when added to other investments in their portfolio against reasonable concentration limits for that investor at the portfolio level.

More important than investment labelling is a clear mapping, with coherent methodology, from the investor to their overall investible assets, focused on long-term needs. This lack of a reliable foundation often leads to considerable inconsistencies between the asset allocation or portfolio risk given to investors with the same identified suitable risk level.

How can Oxford Risk's behavioural suitability tools help you?

The classical approach to investing – treating investors like robots or zombies, by assuming that investing well is as simple as picking an objectively ‘best’ investment and then waiting coolly and calmly until it’s time to cash it in – doesn’t work in real life.

In real life, personal finance is, to its core, inescapably behavioural, which means your suitability processes must be too.

Our tools have been designed to meet the challenges described above. They aim at a deep understanding of individuals rather than a cursory ticking of boxes. Find out more about our Risk Suitability principles in our blog here. We recognise that investing is emotional, and work with this, rather than ignoring it. Our tests are tested to the highest standards. We support decisions throughout the investment journey, rather than relying on a battery of upfront assessments. And we see suitability as an integrated, interdependent system, not a collection of independent components.

To learn more about Behavioural Finance, click here to watch our on-demand webinar .

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Top 20 Behavioural Finance Dissertation Topics for your Next Assignment Submission

• October 15, 2021 October 15, 2021

The maintenance of wealth is as challenging as earning the same. Behavioural finance is a branch of financial management which helps in drawing the line of difference between the expectations of rational and efficient investor behaviour and the actual behaviour. The integration of behavioural finance into the modern corporate practices has turned out to be one of the founding pillars of improving the overall client experience, their constant retention, deepening the relationships, and not to mention, potentially rendering better outcomes.

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(since 2006)

Behavioural finance is one of the important branches of finance offering career opportunities to the freshly graduated students. That is also one of the prominent reasons why students seek assignment help from our experts to excel in their grade points and gain a competitive edge for better career opportunities. Behavioural finance is rightly meant to check the standard pattern of financial decisions taken by an individual. It is regarded more as a psychological arm of finance in comparison to conventional finance, which is more focussed towards the economic models, mathematical calculations, and interpretation of the market behaviour.

Introduction

Behavioural finance is a finance with rational people in it. It helps in setting the benchmarks on the grounds of which the investors judge, forecast, analyse, and review the procedures for financial decision making. The practices include investment psychology, gathering of information, defining, and understanding, as well as to conduct research and analysis. These practices help in safeguarding the interests of the investors by keeping a check over the decision-making biases and the information processing errors impacting their financial decision-making prowess.

Here, moving forward with our legacy of offering free assistance to our students in terms of advising the correct dissertation format or selection of the right dissertation topic, we have brought you the list of top 20 behavioural finance topics for your reference. The best part is that these topics can be used for different assignment writing formats. In case there is paid assignment service requirement for the students to complete their behavioural finance dissertation at any stage, then our assignment writing services can undeniably be a game changer for them.

The Ever-Expanding Scope of Behavioural Finance in Career Opportunities

The study and the degree of behavioural finance open new avenues of career opportunities for the students. The following are some of the important fields of job opportunities that students can always explore once passing out with a degree.

• Stock Broker: The job opportunity of buying and selling the stocks at the direction of the concerned clients.
• Financial Analyst: A professional undertaking the task of financial analysis for internal and external clients in the given organization.
• Behavioural Economics Researcher: The goal of a behavioural economic researcher is to gain a better insight about the human decision-making skill. It helps to economically shape the social phenomena, including the investment activities in private pensions, decisions on finance, health care and education.
• Investment Manager: The manager of a financial institution taking the charge of the asset management of different kinds of securities. These include bonds, shareholdings, and the assets like the real estate.
• Financial Associate: The career opportunities in the jobs of managing the financial tasks within an organization. These include the creation of budgets, planning the investments and making payments.
• Personal Financial Advisor: Offering personalised services to the selective clients with the need for financial advice and services. These are meant to address their money management specific needs, customising the solutions as per the individual needs to prevent costly mistakes, and to mitigate risk.

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Are you struggling to find the right topic for your next financial management dissertation? Reach the below link and explore the most suited one from the hand-picked titles by the experts. 

Must read: top 100 finance dissertation topics trending in the year 2021, top 20 behavioural finance assignment topics for your next submission.

The following is the list of behavioural finance assignment topics that can offer you necessary dissertation help at the time of assignment completion. Now, it is fully anticipated that your topic selection needs will not bother you anymore.

• Reaching out to the decisions of an organizational enterprise for its profit on the grounds of the statistical data
• What is the role of quantitative behavioural finance in terms of maximization of profit of a business enterprise?
• Effective utilization of the quantitative data by an individual of a business enterprise to take into account the necessary decision for the thriving business based upon his own logical thinking
• The influence of empirical knowledge on the grounds of the decision taken by a person about the significant subject of the business
• Throw some light upon the application of the decision theory of behavioural finance in the creation of business associated decision by a person
• What is the role of game theory in behavioural finance and its application in the market forces for supply and demand?
• What is the role of public choice theory in behavioural finance and how to realise its modern context of the business?
• The theory of behavioural finance is identified as the finest theory for the decision making processes of the business: Comment
• The significance of the application of behavioural finance psychology in the process of decision making of a business organization
• How the authenticity of data is managed and its application by an individual for the objective of quantitative behavioural finance?
• The function of conventional methods for the successful creation of the business related decisions through behavioural finance
• The significance of research to render new theories in the field of behavioural finance
• The theories of behavioural finance that required to be substituted after conducting the research in them
• Discuss behavioural analytics theory in behavioural finances by citing pertinent real/ hypothetical examples
• What is the role of psychology in successful thriving of a business with the most suitable examples
• The risk related with behavioural finance on the basis of the psychology of a single individual
• The psychology of a multiple number of people in behavioural finance to decide upon specific matters of the business
• Discuss some of the milestone research successfully conducted in the field of behavioural finance in the contemporary period of time
• Behavioural finance has proven to be important in certain cases for the sake of development: Elaborate
• Economic behavioural finance is catching every eye in the nook and corner nowadays for inclusive financial participation: Discuss the statement with the help of examples

And with that, we come to the end of the list prepared by our expert financial researchers and writers for the sake of your behavioural finance topic selection necessities as a student. While preparing upon the list, we have taken special care to make the topics useful for not only your dissertation writing needs, but also other assignment writing formats as well. In case you are seeking case study help , essay help , research paper writing help , thesis help as well as for the term paper writing help, then also these assignment writing topics can turn out to be more relevant than a source elsewhere.

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Must read: manage budgets and financial plans – sample.

The selection of the right behavioural finance topic helps in saving precious amounts of time and efforts that play a critical role in completion of the task within the stipulated deadline. The subject helps us understand how the decisions on financial matters such as payments, investments, personal debt, and risk are greatly impacted by the human emotion. Mastering the core concepts of the subject can help us keep a check on the cognitive limitations and the biases in responding and processing of the information.

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Behavioural Finance

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Behavioural Finance Assignment: A Rhetorical Précis on Financial Management

Task: Behavioural finance seeks to explain financial phenomena based on non-rational behaviour amongst investors. Discuss the critical literature in this field using relevant and recent authoritative sources and assess how behavioural finance can be applied in the context of corporate finance i.e. in linking the behavioural characteristics of top executives and their decision-making.

• You are required to write a behavioural finance assignment on rhetorical precis of no less than 700 and no more than 1000 words (not including bibliography).
• You must have used exactly eight sources of published literary sources.
• The tutor will provide three out of the eight sources.
• You are required to obtain five of the required eight sources independently

Introduction to a precis In the journal named “Behavioural mediators of financial decision-making-a state-of-art literature review”, Nigam et al., (2018) considered herein behavioural finance assignment assessed the specific models and theories of traditional and modern times that provided the features of establishing financial behaviour among the individual investors. The journal has been used to specify the features of the work of finance and its activities that possess certain benefits upon being applied. The journal also included the relevant data and features of behavioural finance for explaining the finance-related activities linked to non-rational behaviour within the investors.

Sentence 1 In the journal, Nigam et al., (2018) opined that the studies of behavioural finance have been able to highlight and clarify the behavioural variables providing help to make finance-related decisions in a well-planned way. The journal also threw light upon developing the reasons of decision making among the market investors who exist. The stocks of market and the market bubbles were covered and they impacted the making of decisions by the investors for designing the finance related behaviour. The behaviour of the investors have been treated to be normal under the traditional finance theory. The concept related to bounded rationality referred to the fact that the cognitive abilities of the individuals were finite and had limits pertaining to possessing concept related skills.

Traditional and behavioural finance theories had their differences upon being applied. According to Nigam et al., (2018), traditional finance theory identified that the different investors possessed the self-control and the rationality within making decisions; however, behavioural finance highlighted the fact that the individual investors were impacted by certain errors associated with their cognitive ability to make decisions. This led them to make mistakes while making finance related decisions. The hypotheses related to establishing efficiency in markets have been contradicted by applying arguments falling under the purview of behavioural finance (Mindra and Moya 2017).

Kapoor and Prosad (2017) in their journal “Behavioural finance: A review. Procedia computer science” developed and discussed about the traits of expected utility theory and its features were included under the traditional approach and its features being designed for demonstrating the significance of the finance-related behaviour of the individuals. Markowitz's portfolio theory and its features formed one of the highest quality CAPM models which were designed in a specific way for explaining the financial decisions being made. The theories of asset pricing also can be explained by aligning the well-defined assumptions being linked to the market and the operations being executed.

Sentence 2 The disruption that exists in the stock markets could not be explained by the traditional theories providing ideas about financial behaviour. The anomalies in the stock market arose from frequent disruptions taking place within the bubble zones. The journal “Investor Psychology and Behavioural Finance” written by Gupta (2019), included the indisruptions that arose all of a sudden due to overreactions in the market. By applying the features of behavioural finance theory, the behaviour of the investors have been treated to be normal and not as rational. The investors have certain limits or regulations related to controlling themselves. The cognitive errors committed by the investors can lead them to make non-rational and wrong decisions.

Sentence 3 The journal named “Influence of behavioural factors affecting investment decision” by Antony and Joseph (2017) mentioned the financial biases among the individual investors were also explained for developing ideas about the financial decisions they would be taking in the social circle. The biases of the individual investors act as an influence for them to take decisions related to finance. The suboptimal decisions were taken by the investors. The effect of miscellaneous market bubbles such as the inclusion of the wide range of technology-related innovations and numerous risks being highlighted were mentioned and their positive influence upon developing the financial behaviour among the individuals was explained (Virigineni and Rao 2017).

Sentence 4 Valaskova et al., (2019) opined in the journal “Behavioural aspects of the financial decision-making” that exuberant investors provide the support to enhance the values of financial assets behind the financial irregularities that exist in the market. The emotional element influences the investors to make decisions according to their mood and temperament. According to Dittenhofer A (2001), the management accounting systems operated by the inclusion of users and customers so, it had to be set up in a perfectly planned way to highlight the decision making of the management accountants who operate in the financial organisations. The financial information that was governed by the managers was different in case of public and private sector organisations. The adverse reactions of the government groups were influenced by the user information that was processed. The goals of the organisations and the participant’s behaviour helped the investors to make suitable financial decisions.

The journal included the features of normative theory of finance has helped in developing a logic for establishing appropriate information and framing structures of decision making. This helps in managing corporate planning activities by the appropriate use of the finances. In the specific journal “How behavioural biases affect finance professionals”, Baker et al., (2017), the biases found within the behaviour of the individual consumers have an influence upon the investors to make decisions. The behavioural finance aspects could be linked to the errors and biases of decision making. According to Funkhouser (2019), self-deception affects the decision making of the investors as it makes such individuals think that they know much more than they really do and that leads them to make a non-rational and wrong decision. Heuristic simplification is another bias that leads the investors to make wrong decisions due to getting access to wrongly processed information.

A Precis Conclusion The short precis related to establishing the financial features developed the financial behaviour among the individuals who lived in the market. The relevant sources being used had helped in demonstrating the reason behind the adoption of certain behavioural traits of the individuals. The journals also included the financial management of the professionals who worked in governmental offices. Moreover, the quality strategies were included to design and develop the financial behaviour in a planned way. The normative theories of developing the appropriate financial behaviour for making decisions was developed. The features of the traditional approach of determining financial behaviour and the features of modernised approach of financial behaviour were developed within the journals and analysed.

Bibliography Antony, A. and Joseph, A.I., 2017. Influence of behavioural factors affecting investment decision—An AHP analysis. Metamorphosis, 16(2), pp.107-114.

Baker, H.K., Filbeck, G. and Ricciardi, V., 2017. How behavioural biases affect finance professionals. The European Financial Review, pp.25-29.

Dittenhofer A. Mortimer., 2001. Behavioural Aspects of Government financial management. Managing Auditing Journal, 16/8 [2001], pp.451-457

Gupta, C., 2019. Investor Psychology and Behavioural Finance. Available at SSRN 3432901.

Kapoor, S. and Prosad, J.M., 2017. Behavioural finance: A review. Procedia computer science, 122, pp.50-54.

Nigam, R.M., Srivastava, S. and Banwet, D.K., 2018. Behavioral mediators of financial decision making–a state-of-art literature review. Review of Behavioral Finance.

Valaskova, K., Bartosova, V. and Kubala, P., 2019. Behavioural aspects of the financial decision-making. Organizacija, 52(1).

Virigineni, M. and Rao, M.B., 2017. Contemporary developments in behavioural finance. International Journal of Economics and Financial Issues, 7(1).

Funkhouser, E., 2019. Self-deception. Routledge.

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Behavioral And Personal Finance

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Business process delegation updates for finance and human resources.

Beginning on Friday, May 24 , delegation will be enabled on several Workday business processes. Prior to this change, delegation was only enabled on time tracking and financial business processes.  These changes will make the functionality available to human resources business processes. 

  If you have a step in the process, you will be able to use the "Request Delegation" task to temporarily delegate your work to an appropriate individual because you will be out of the office or otherwise unavailable to complete or approve transactions in Workday. Delegation will be available for the business processes listed below.

• Add Additional Job  
• Assign Costing Allocation (Cost Center Manager was added with the position control project)   
• Change Job  
• Change Organization Assignments for Worker  
• Create Payroll Accounting Adjustments  
• Edit Position 
• Edit Position Restrictions  
• Job Requisition  
• Period Activity Pay  
• Request Compensation Change   
• Request One-Time Payment 

This expanded functionality offers the benefits of (1) a formalized process for assigning work to appropriate and responsible parties when planning time away and (2) assurance that your time-sensitive tasks have been appropriately delegated and can be managed in your absence, thereby providing peace of mind while away.

  Delegation requests should be for 30 days or less unless there are extenuating circumstances (e.g., employee on a leave of absence) that may require up to 180 days of delegation. Refer to the  delegation job aid  in the Administrative Resource Center for more information. Additionally, an enhancement was made to include the worker job profile on the "Delegations History - OSU" (Tableau Report). Please make sure to monitor the report monthly to ensure delegations are appropriate.