How Emotions And Cognitive Biases Affect Making Investment Decisions?

I never thought of one’s personal psychology would have such a deep impact on making investment decisions. I believed that people with a high level of knowledge and sufficient experience would always make rational decisions and predict future tendency appropriately. Almost everything changed after taking the Behavioural Finance lecture. For example, traditional finance assumptions tell us that people are risk averse. People’s behaviors should be consistent with their level of risk tolerance. However, in the real word, these assumptions are violated due to psychological biases. I was delighted to know how emotions and cognitive biases affect financial decisions, corporations, and the financial markets.

I am always thinking myself as quite …show more content…
In reality, the situation might be just the opposite. There is a psychological bias called the misattribution bias. That is, people often misattribute the mood (or affect) they are into the financial decision at hand. For example, we feel good when today is a sunny day. Furthermore, we will be more optimistic about future prospects and more likely to buy stock than sell stock. Researchers have found evidence that sunny days outperformed miserable weather days with higher returns. Since our investment decision inevitably influenced by emotion, why not take advantage of this for predicting stock price trend. Also, we need to control our emotions carefully. Optimistic investors tend to be less critical while pessimistic investors tend to be more analytical. Do not show excessive optimism or excessive pessimism because both of the two emotions will cause decision-making …show more content…
These biases affect people’s investment behaviours and directly or indirectly post impact to the financial market. After that, market volatility will cause feed back to the investor again. This is a circulation. Some of the psychological biases can be overcome through specific methods while others are difficult to deal with. We need to try our best to keep sane and clearly know ourselves. If you want to become an excellent investor, you have to be mentally strong and not to be limited by personal emotion. You also need to collect information from different sources and analysis of all the things