Friday, August 18, 2006
Behavioral finance
For all those who dabble into the financial markets, let me point to an interesting field of behavioral finance.
Some interesting theories
1. Loss aversion - A 100 Rs. loss gives twice as much grief as the happiness of a 100 Rs. profit. So people tend to hold on to losses.
2. Endowment effect - The tendency to value something more when we posses it
3. Availability heuristic - Making judgement on what we remember rather than by looking on complete data. So everybody chases the next Infosys forgetting that there are several other companies which bit the dust.
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Current music : Tumhi Dekho Na/KANK
Some interesting theories
1. Loss aversion - A 100 Rs. loss gives twice as much grief as the happiness of a 100 Rs. profit. So people tend to hold on to losses.
2. Endowment effect - The tendency to value something more when we posses it
3. Availability heuristic - Making judgement on what we remember rather than by looking on complete data. So everybody chases the next Infosys forgetting that there are several other companies which bit the dust.
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Current music : Tumhi Dekho Na/KANK
// posted by aditya @ 3:02 PM 
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Well, does "compulsive investing" also fall under this category? Many times I see people are into buying and selling when they can sit and relax and wait for the right time to book profits or to enter market.
Yeah, investing is a very emotional activity for all people.
So when prices rise, they are forced to buy and when prices are falling, they sell.
There is a nice comment in the book "The Intelligent Investor" (which is argued to be the best book on investment). It goes like this "Investment is not about beating anybody in the game, it is controlling yourself at your own game".
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So when prices rise, they are forced to buy and when prices are falling, they sell.
There is a nice comment in the book "The Intelligent Investor" (which is argued to be the best book on investment). It goes like this "Investment is not about beating anybody in the game, it is controlling yourself at your own game".
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