The Impact Of Psychology On Investment Decisions - 1232 Words

The Impact of Psychology on Investment Decisions Investment analysis is said to be psychological in various aspects. The irregularity observed in financial markets in recent times has yet again brought to question the practical application of traditional financial theory and the Efficient Market Hypothesis. There is therefore the need to put this base of accepted finance theory under scrutiny. The foundation of one of the broadly examined problems with traditional financial theory is the effect of psychological influences on individuals’ behavior towards investment. According to Slovic (1972), Daniel, Hirshleifer ,Subrahmanyam (1998) and Hilton (2001), they believe that financial markets are functioning at a rapid and increasingly cut throat environment and have been transformed in several ways, one of which is technological. The growing rate of technology has had an immense effect on trading and investment. Technology has aided in allowing information to be easily accessible to investors, but there has been little focus on the issue of interpreting the information skillfully. It is important to note that the appropriate use of information is a crucial part in making investment decisions. Behavioral Biases Investment analysis is said to be psychological in various aspects. The aspects of psychological biases examined are overconfidence, representative bias, prospect theory, mental accounting and risky shift. Research shows that most investors are overconfident in theirShow MoreRelatedIs College A Good Or Bad Investment For The Future?959 Words   |  4 PagesWhen one thinks of college, a person does not question if it is a good or bad investment for the future. Most people would say that college is the greatest decision they made, but is it the best decision for everyone? 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