Investing is all about numbers and getting the best return you can with your money, so it makes sense to assume that any investor would always take a cool, logical approach to investment. Up until fairly recently, traditional finance theory has championed the idea that markets are efficient and logical.
The Efficient Market Hypothesis, for example, states that prices in the market accurately reflect information that is available at all times – and that people will be able to use this knowledge to make investment decisions. However, what it assumes as well is that all investors will value stocks in the same way, which is definitely not the case. The human method of thinking and behaving plays a massive role in investment and can have a significant impact on the stock market.
What the academic world of finance is starting to take into account is the human aspect of finance – because humans are illogical, emotionally driven and sometimes make decisions that don’t make any sense. Studying the human behaviours behind finance and investing may not make for a model which can correctly predict the actions and reactions of the stock market, but it can help explain what’s already happened. Understanding ourselves as human beings will in turn help us avoid the biases that we’re unconsciously obeying and ensure we invest our money better.
In the upcoming behavioural finance articles, we will explore different theories, biases and experiments which shed light into the very unpredictable world of finance – so stay tuned to the blog and subscribe to our mailing list at the bottom of the page to get email updates.