Behavioural Finance

BEHAVIORAL
FINANCE
PRESENTATION BY:
ANANDITA DUGGIRALA (21BC534)

AKANKSHA BHATT (21BC568)
What is behavioral
finance?
Behavioral finance consists of experiments and
research to demonstrate that humans and
financial markets are not always rational, and the
decisions they make are often flawed. Behavioral
finance offers answers and explanations on how
emotions and biases drive share prices,
By showing how, when, and why behavior

deviates from rational expectations,
behavioral finance provides a blueprint to
help everyone make better, more rational
decisions when it comes to their finances.
Overconfidence Bias
Tendency to hold a false and misleading assessment of our skills, intellect, or
talent. An egotistical belief that we’re better than we actually are. It can be a
dangerous bias and is very prolific in behavioral finance and capital markets.
Over Ranking Illusion of Control
Over ranking is when someone rates The illusion of control bias occurs when
their own personal performance as people think they have control over a
higher than it actually is. situation when in fact they do not.
Timing Optimism Desirability Effect

Where people overestimate how quickly When

people overestimate the odds of

they can do work and underestimate something happening simply because the
how long it takes them to get things outcome is desirable. This is sometimes
referred to as “wishful thinking”
done.
Loss Aversion
Loss aversion is a bias toward avoiding losses over
seeking gains. It helps explain why Losses hurt
more than gains are savored.
It causes us to avoid small risks even when they're

probably worth it. It's why people save rather than
invest.
Overcoming the Bias

By devising a sound investment strategy and
sticking to it in the long run can help one realize
that taking small risks can eventually result in huge
gains
Loss Aversion
Anchoring Bias
Anchoring is a phenomenon where someone
values an initial piece of information too much to
make subsequent judgments.
This can influence decision-making regarding a

security, such as when to sell or buy an investment.
Since many investment decisions require multiple

complex judgments, they're vulnerable to anchoring
bias.
Overcoming the Bias

Research and comprehensive assessment of the
situation before taking decisions and being open
to new information, can help overcome this bias.
Anchoring Bias
"When 1 crore people say something foolish,
it is still foolish"
Herd Mentality Bias
Herd mentality bias refers to investors’
tendency to follow and copy what other
investors are doing. The key thing is that we are hard-wired to herd
Dotcom Bubble
Many dotcom companies did not have
financially sound business models, but many
investors bought into them because everyone
else was buying into them. Just as the market
peaked, investment capital began to dry up,
which led to the bursting of the bubble and
steep investment losses.
How to Avoid the Herd Instinct
Herding may be instinctual but there are ways

for you to avoid following the crowd, especially if

you think you'll be making a mistake by doing so.
Stop looking at others to do the research and take the

steps to study the facts for yourself
Do your due diligence and then develop your own

opinions and your final decision

Ask questions about how and why people are taking

certain actions and make your own decisions

Take the initiative, be daring, and don't be afraid to

stand out from the crowd
Mental Accounting
Mental accounting refers to the concept where
people treat money differently depending on where
it came from and what we think it should be used
for.
The idea is that we separate our money into
"mental accounts" for different uses, which
influences our spending decisions.
Overcoming the Bias

Creating a budget for financial decisions helps when
we need to choose between saving and spending.
One can create a plan for spending windfall gains,
like an inheritance or work bonus, ahead of time.
Mental Accounting
THANK YOU

Behavioural Finance

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BEHAVIORAL

ANANDITA DUGGIRALA (21BC534)

By showing how, when, and why behavior

Over Ranking Illusion of Control

Timing Optimism Desirability Effect

people overestimate the odds of

It causes us to avoid small risks even when they're

Overcoming the Bias

This can influence decision-making regarding a

Since many investment decisions require multiple

Overcoming the Bias

for you to avoid following the crowd, especially if

Stop looking at others to do the research and take the

Do your due diligence and then develop your own

Ask questions about how and why people are taking

Take the initiative, be daring, and don't be afraid to

Overcoming the Bias

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