Due to overconfidence behaviour, investors trade too much or take too much risk because they are certain about their opinions. They believe that they can predict the winner. Figure 6 helps us to understand the behaviour of overconfident investors.
Figure 1.6: Are you an overconfident investor? Source: http://www.safalniveshak.com/are-you-overconfident-investor/
1.9.2. Loss Aversion
According to Daniel Kahneman and Amol Tversky, loss Aversion is defined as “tendency of people to strongly prefer avoiding losses than acquiring gains”. In general pain of losing is about twice as making gains. It is one of the most important biases of behavioral finance as when people cannot handle loss; they avoid taking high risk and prefer to play safe while …show more content…
Herding is a very common investor behavioural trait, where people copy each other. When we don’t know what to do, we tend to copy each other. Similarly, when investors are exposed to conditions of uncertainty, they adjust their investment based on what other people are doing and invest where others are investing, rather than trying to search for information and doing fundamental analysis of their own. The problem is that they think that the other person is very confident and knows everything, so they blindly follow him or her. But if no one knows what to do and investors just outsourcing their judgement to other people who don’t have any clue of what’s really going on and have no better idea than them. Herding can be classified as rational herding and irrational herding.
1.9.3.1. Rational herding
In Rational Herding, investors or participants behave to the information about the behaviour of other investors or participants rather than the behaviour of the market. Participants follow others, believing that others are better informed than themselves.
1.9.3.2. Irrational herding
Irrational Herding is something that is caused by the investor’s own belief, sentiments and positive …show more content…
All this separation of money into buckets is influenced by mental accounting bias. Mental Accounting is also known as two-pocket theory refers to coding, categorization and evaluation of financial decisions.
Kahneman and Tversky in their ‘classical theatre ticket problem’, experimented 200 participants to explain mental accounting bias. He took two cases-
Case 1- Imagine that you have decided to watch a movie tonight and you already purchase a ticket for $10. As you enter the theatre, you discover that you have lost the ticket. The ticket officer tells you they keep no records so you will have to purchase a new ticket to see the movie. Would you still pay $10 for another ticket?
Case 2- Imagine that you have decided to watch a movie tonight and the ticket is $ 10. As you enter the theatre you discover that you have lost $10 bill on the way. Would you still pay $10 for a
Figure 1.6: Are you an overconfident investor? Source: http://www.safalniveshak.com/are-you-overconfident-investor/
1.9.2. Loss Aversion
According to Daniel Kahneman and Amol Tversky, loss Aversion is defined as “tendency of people to strongly prefer avoiding losses than acquiring gains”. In general pain of losing is about twice as making gains. It is one of the most important biases of behavioral finance as when people cannot handle loss; they avoid taking high risk and prefer to play safe while …show more content…
Herding is a very common investor behavioural trait, where people copy each other. When we don’t know what to do, we tend to copy each other. Similarly, when investors are exposed to conditions of uncertainty, they adjust their investment based on what other people are doing and invest where others are investing, rather than trying to search for information and doing fundamental analysis of their own. The problem is that they think that the other person is very confident and knows everything, so they blindly follow him or her. But if no one knows what to do and investors just outsourcing their judgement to other people who don’t have any clue of what’s really going on and have no better idea than them. Herding can be classified as rational herding and irrational herding.
1.9.3.1. Rational herding
In Rational Herding, investors or participants behave to the information about the behaviour of other investors or participants rather than the behaviour of the market. Participants follow others, believing that others are better informed than themselves.
1.9.3.2. Irrational herding
Irrational Herding is something that is caused by the investor’s own belief, sentiments and positive …show more content…
All this separation of money into buckets is influenced by mental accounting bias. Mental Accounting is also known as two-pocket theory refers to coding, categorization and evaluation of financial decisions.
Kahneman and Tversky in their ‘classical theatre ticket problem’, experimented 200 participants to explain mental accounting bias. He took two cases-
Case 1- Imagine that you have decided to watch a movie tonight and you already purchase a ticket for $10. As you enter the theatre, you discover that you have lost the ticket. The ticket officer tells you they keep no records so you will have to purchase a new ticket to see the movie. Would you still pay $10 for another ticket?
Case 2- Imagine that you have decided to watch a movie tonight and the ticket is $ 10. As you enter the theatre you discover that you have lost $10 bill on the way. Would you still pay $10 for a