Psychological decision. Emotional and cognitive weaknesses or

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Psychological research has
shed new light on the emotions and psyche of people have a significant influence on
their making a financial decision. Emotional and cognitive weaknesses or
biases affect all people and people
cannot behave rationally overtimes during making a financial decision. The most
important proofs of this are fluctuated stock movements, profitable and loss investing,
crisis, collapses, balloons etc. With this line, behavioral finance contradicts
the assumptions of classic finance model. Because standard finance
usually ignores these biases. For
example; one of CAPM theory says that “investors are perfectly rational in making financial decision”. But
it is not available supposition every time. Some of investor makes profit with
their rational decision on the other hand some of investors make loss with
their irrational decision.  That’s why behavioural
finance needs to provide the explanation of this phenomenon.  Many
decision of people based on belief under any undefined events (Tversky & Kahneman,
Tversky and Kahneman (1974) lead the theory of behavioral finance with their
article. In the paper, people trust some of empirical doctrines and they use
the doctrines to assess probability and to predict values in the future. After
these workings,    Kahneman and Tversky won the Nobel Memorial Prize in Economic Sciences in 2012 by their present about
“Prospect Theory” that was published in 1979. Recent researches find out
that there are some specific biases that influence investor decisions. They defined the criteria of expected utility
theory about psychology of judgment and decision making under risk. This theory
is still keeping on availability for behavioral financial studying. Basically,
they asked two questions to the experiments in the theory.  If it is needed to explain the theory
basically, there are two question and two alternative for each to define the
experiments” financial decision. 

Categories: Decision Making


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