Some findings from Behavioral Finance
Behavioural finance is a subfield of behavioural economics, which argues that financial decisions such as investing are not as rational as traditional financial theory predicts. For investors curious about how emotions and biases determine stock prices, behavioural finance offers some interesting descriptions and explanations.
The idea that psychology drives stock movements contrasts with established theories that support the idea that financial markets are efficient. Proponents of the Efficient Market Hypothesis (EMH), for example, argue that any new information relevant to value is quickly assessed by the market. Therefore, future price changes are random because all available information (public and some non-public) is already discounted to present values.
However, for anyone who weathered the dot-com bubble and the crash that followed, the effective market theory is hard enough to digest. Behaviourists explain that instead of being anomalies, irrational behaviours are commonplace. Researchers have regularly reproduced examples of irrational behaviour outside of finance using very simple experiments.
“It is underestimated to say that financial health affects mental and physical health and vice versa. It’s just a circular thing that happens, ”said Dr Carolyn McClanahan, Founder and Director of Financial Planning at Life Planning Partners Inc.“ When people are stressed about finances, they release chemicals called catecholamines. I think people have heard of things like adrenaline and things that set your whole body on fire. So it affects your mental health, it affects your ability to think. It affects your physical health, it makes you tired, it makes you tired, and you cannot sleep. And then once you can’t sleep you start having bad behaviours to deal with it.
