Behavioral Fiance

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In addition, knowledge is also one of the reason that influence decision making. Knowledge can be gained through analyst option, training, reports or internet. The illusion of knowledge is behaviour that leads directly to overconfidence where there is tendency to believe that with the expertise in a certain area may contribute to greater accuracy in decision making. According to “Bruin et al. 2007” people who have less knowledge tend to focus more on past experience which are more at risk to experience negative life events as they make poor decision. In “Journal of Finance, Haigh and List (2005)” the study shows traders exhibited more myopic risk aversion than students. The professionals were more confident than beginners in concluding the decision as they have a higher expertise in investment area. Its shows that the beginner’s idea is not important as they have less knowledge. Therefore, its biases clearly project that experience does not always produce expertise. Referring only to the past event will result in false decision as market can be irrational. Having knowledge in finance academics leads the investor to be more experience with lots of scenario and be able to predict future more accurately with clearer casual interpretation. However, they will become more and more problem during the technology era as online trading have publicly exposed to the public investor. Overconfidence in making decision lead to poor investment since the investors tend to believe their decisions will always project income and therefore, investors tend to forgone the possibility of losses.

Lastly, belief in personal relevance also resulted in a change in the way traditional finance work. Investor’s hold or trust on something that have tendency to make conclusions due to believable rather than logically valid. Based on “Danna Torrens, 1999”, magnitude of belief bias effect can be predicted based on the number of models that reasoners were able to generate. In this study, people who generated fewer alternatives were more biased by beliefs rather than people who generated more alternatives. It happens due to the reasoners fail to consider others alternatives. Switching from low risk to the high risk could not attribute to the beliefs but related to changes in preference. Beliefs is more related on something that investor hold such as beliefs in the propensity to take risks will increase the positive outcomes affect and decrease the outcomes by the negative affect. Beliefs are generated by past experience therefore, belief in each investor will be different. A decision made through beliefs is when the new information matches with the investor’s belief and goals. Any beliefs that matches with the new information may contribute to the satisfaction level and boost up the confident in identify the alternatives or available investment options that project more attractive return whereas if the information does not match, people will ignore about the investment options and tend to follow the belief that investors hold. Based on the experiment “The Influence of Effect on Beliefs, Preference and Financial Decision”, investor who choose and beliefs that certain investment types will bring the investment more attractive after the choice has been made eventhough the outcomes still uncertainty. As investor hold their beliefs, they tend to ignore information that is not attractive with their choice which leads to poor investment decisions. Beliefs however, do not always project the result correctly, therefore, it can turns out to be a good investment or bad investment.

As a conclusion, people need to make decisions whether big or small in a rational way so that investor will not experience any losses. Each of the breakthroughs plays a significant role in how the investor perceive the nature of a decision with the available options. Regardless of how mature an investor, investor tend to deal with behavioural biases that cause them to make irrational decision. Emotion, gender, beliefs, attractiveness as well as knowledge are the most significant breakthrough in behavioural finance.

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