In the present scenario, behavioural finance is becoming an integral part of the decision-making process, because it heavily influences investors’ performance. They can improve their performance by recognising the biases and errors of judgement to which all of us are prone. Understanding the behavioural finance will help the investors to select a better investment instrument and they can avoid repeating the expensive errors in future. The pertinent issues of this analytical study are how to minimise or eliminate the psychological biases in investment decision process.
Emergence of Behavioural Finance
The principal objective of an investment is to make money. In the early years, investment was based on performance, forecasting, market timing and so on. This produced very ordinary results, which meant that investors were showered with very ordinary futures, and little peace of mind. There was also a huge gap between available returns and actually received returns which forced them to search for the reasons. In the examining process, they identified that it is caused by fundamental mistakes in the decision-making process. In other words, they make irrational investment decisions. In recognizing these mistakes and means to avoid them, to transform the quality of investment decisions and results, they realized the impact of psychology in investment decisions. Several years ago, the researchers began to study the field of Behavioral Finance to understand the psychological processes driving these mistakes. Thus, Behavioural finance is not a new subject in the field of finance and is very popular in stock markets across the world for investment decisions. Many investors have, for long considered that psychology plays a key role in determining the behaviour of markets. However, it is only in recent times that a series of concerted formal studies have been undertaken in this area. Paul Slovic’s2 paper on individual’s misperceptions about risk and Amos Tversky and Daniel Kahneman’s papers on heuristic driven decision biases3 and decision frames4 played a...