Question 1

What is behavioral finance theory?

Accepted Answer

Behavioral finance theory states that individual psychology influences behavior when making financial decisions. It considers investors as irrational and have limited self-control. It highlights the effects of cognitive biases in decision-making.

Question 2

What is framing in behavioral finance?

Accepted Answer

Framing refers to the bias that occurs when a person makes decisions based on how information is presented. People tend to react differently depending on the context and presentation of options. For instance, instead of looking at the facts only, investors consider how an investment is framed.

Framing also covers the subcategory narrow framing, wherein a person focuses on only some aspects of a situation. Because of this, they end up excluding other crucial parts.

Question 3

Why are investors irrational according to behavioral finance?

Accepted Answer

Behavioral finance sees investors as irrational due to the cognitive biases ingrained in each person’s psychology. These biases can affect investment and financial decisions in a negative way because they can prevent a person from making well-informed and data-driven choices.

Question 4

Why study behavioral finance?

Accepted Answer

Understanding Behavioral Finance allows you to figure out how your biases affect decision-making. That is especially important when it comes to your finances. By knowing how to assess your biases, you can deviate from irrational choices and prevent yourself from making ill-informed decisions.

Question 5

What are the pillars of behavioral finance?

Accepted Answer

There are three pillars of behavioral finance. These are the fields of finance, psychology and sociology.

Finance refers to the discipline that covers value determination and decision-making.
Psychology studies human behavior, including mental processes and how these are affected by environments.
Sociology, on the other hand, is the study of human and group social behaviors. It determines how social relationships influence a person’s behavior.

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