Categorized | Behavioral Economics

Behaviorist: Understanding Investor Behavior

Literally, a behaviorist is someone who embraces the theory of behaviorism. And, as it relates to investing, behaviorists and behaviorism examine investors’ behavior in investing.

Thus, when it comes to stock or other investing, people may think they are very rational when they are actually not. Behaviorists are of the opinion that investors usually act irrationally when it comes to investment decisions, which in turn leads to issues such as incorrect pricing of securities that would ultimately result in market inefficiencies (creating opportunities to make money as well).

Understanding Investor’s Behavior

As mentioned earlier, people are usually not as rational as they perceive when investment decision is involved. This is why the behaviorist and behaviorism theories abound to explain humans’ sometimes-strange behavior. As an investor, where do you fit in? Behavioral finance may help offer some clues about the answer to this question.

Examining Behavioral Finance in Brief

Often, economic theories are based on the assumption (or rather belief) that people behave rationally and that the entire existing information is rooted in the investment procedure. However, this is only an assumption that has been the core of the efficient market hypothesis.

On the other hand, researchers who are at loggerheads with this assumption have found contrary evidence, proving that people don’t often exhibit rational behaviors as was wrongly believed. Therefore, behaviorist through the concept of behaviorism as well as behavioral finance takes some steps to gain insight and explain how investors are guided by their emotions in their decision-making process. You will be surprised at what these researchers found. In summary, the research termed “Quantitative Analysis of Investor Behavior” showed that average investors were not able to attain market-index returns.

The bottom line according to the behaviorist from the concept of behavioral finance is; one of the best ways not to meddle with the common investing pitfalls is to implement a well-thought out strategy and stick to such strategy.

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