The Impact Of Psychology On Investment Decisions

1232 Words Sep 14th, 2016 5 Pages
The Impact of Psychology on Investment Decisions

Investment analysis is said to be psychological in various aspects. The irregularity observed in financial markets in recent times has yet again brought to question the practical application of traditional financial theory and the Efficient Market Hypothesis. There is therefore the need to put this base of accepted finance theory under scrutiny. The foundation of one of the broadly examined problems with traditional financial theory is the effect of psychological influences on individuals’ behavior towards investment. According to Slovic (1972), Daniel, Hirshleifer ,Subrahmanyam (1998) and Hilton (2001), they believe that financial markets are functioning at a rapid and increasingly cut throat environment and have been transformed in several ways, one of which is technological. The growing rate of technology has had an immense effect on trading and investment. Technology has aided in allowing information to be easily accessible to investors, but there has been little focus on the issue of interpreting the information skillfully. It is important to note that the appropriate use of information is a crucial part in making investment decisions.

Behavioral Biases
Investment analysis is said to be psychological in various aspects. The aspects of psychological biases examined are overconfidence, representative bias, prospect theory, mental accounting and risky shift.

Research shows that most investors are overconfident in their…
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