Behavioral Finance and Investor Types: Managing Behavior to Make Better Investment Decisions (2024)

FAQs

What are the different types of investors in behavioral finance? ›

This framework has four behavioral investor types: the Preserver, the Follower, the Independent, and the Accumulator. Each of these types will be reviewed in detail; in fact, each has its own chapter in this book.

According to the results, investor emotion, overconfidence, over/underreaction, and herd behavior all have a large impact on investing decisions. Additionally, investors' investing selections are significantly and favorably influenced by their age, gender, and degree of education.

It portrays the behavior of investors and management in decision-making; it illustrates the outcomes of interactions between investors and managers in financial and capital markets. As decision- making is an art to undertake complex situations and investors make irrational decisions during their investments.

Research from SAM's LifeValues Quiz identifies four categories of values that drive financial behaviors: inner values, social values, physical values and financial values.

The major investment styles can be broken down into three dimensions: active vs. passive management, growth vs. value investing, and small cap vs. large cap companies.

And yet, there is no dearth of investors making irrational decisions. Clearly, something else is at play here – cognitive bias and limits to arbitrage. These are the two pillars of behavioural finance.

Specifically, it focuses on four prevalent behavioral biases: loss aversion, endowment bias, framing bias, and overconfidence bias, examining how these biases can lead to potential investment mistakes or risks.

Some common behavioral financial aspects include loss aversion, consensus bias, and familiarity tendencies. The efficient market theory which states all equities are priced fairly based on all available public information is often debunked for not incorporating irrational emotional behavior.

The key concepts in behavioral finance, such as bounded rationality, heuristics, prospect theory, mental accounting, and biases like overconfidence, confirmation bias, and loss aversion, highlight the irrational financial choices people make, deviating from the assumptions of traditional finance models.

The goal of behavioral finance is to aid in the understanding of why individuals make various financial decisions and how those decisions influence the market. It is also useful in the analysis of fluctuations and the levels of market prices to be used for predictions and for purposes of making decisions.

What is behavioral theory of financial decision-making? ›

People often make financial decisions based on emotions rather than rationality. Behavioral finance uses financial psychology to analyze investors' actions. According to behavioral finance, investors aren't rational. Instead, they have cognitive biases and limited self-control that cause errors in judgment.

Character, capital, capacity, and collateral – purpose isn't tied entirely to any one of the four Cs of credit worthiness. If your business is lacking in one of the Cs, it doesn't mean it has a weak purpose, and vice versa. Instead, the four categories come together to constitute purpose.

Some of the most common factors that influence financial decisions include age, marital status, employment status, and the number of household members. Certain factors influence financial decisions more than others.

The three types of investors in a business are pre-investors, passive investors, and active investors. Pre-investors are those that are not professional investors.