Heuristics
Heuristics are cognitive shortcuts that people use to make decisions. These shortcuts are often based on experience or intuition, rather than reason.
Prospect theory
Prospect theory is a model of decision-making that takes into account the fact that people are not rational actors. It assumes that people make decisions based on how they expect an event to turn out, rather than on the actual probability of it happening.
Mental accounting
Mental accounting is the process of assigning different values to different items based on personal factors. For example, someone might be more likely to spend $100 on a new shirt if they perceive it as being worth $50, even though it costs $100.
Overconfidence
Overconfidence is the belief that one knows more than one actually does. This can lead to bad decision-making, as people may take on too much risk or make poor investment choices.
Anchoring
Anchoring is the tendency to base decisions on past information, even if that information is no longer relevant. For example, someone might make a decision based on the price they paid for a stock, rather than on its current market value.
Each of these concepts helps to explain why people make financial decisions that they do, and how these decisions can lead to sub-optimal outcomes.
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Why is behavioral finance important?
Behavioral finance is important because it helps us to understand why people make the financial decisions they do. It can also help us to make better decisions ourselves.
By understanding the psychological factors that influence financial decisions, we can make more informed choices about our own money.
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