Have you ever made a successful trade and thought to yourself, “Yeah I knew it, I’m so great, I should start a hedge fund!”? When a couple wins in the stock market it feels like you’re ready to challenge Warren Buffett? There’s nothing wrong with being right a couple of times and winning certainly boosts […]
Category: Irrational Investments and Behavioural Finance
Loss Aversion and the Sunk Cost Trap in Venture Capital In the high-risk world of venture capital (VC), balancing the tightrope of innovation and risk is a key skill to master. Knowing when risks have reached their limits can mean the difference between cutting losses and doubling down in hopes of a future payoff. This […]
In the realm of economic theories, where choices appear as outcomes of stable preferences, Cognitive Economics introduces a novel perspective. This field, blending insights from economics, neuroscience, and cognitive psychology, seeks to unravel the mysteries of human decision-making, challenging conventional wisdom. Classical Economics assumes that choices derive from stable preferences, whereas Behavioral Economics ventures into […]
It is well known that many external factors and personal biases affect investors and make them behave irrationally. But did you know that even the seasons of the year can affect investor behavior? The important factor that changes over the seasons of the year is the length of the day, so how many hours of sunlight there […]
Rumours run the market Every day we hear or read about companies being interested in buying other companies or announcing stock splits. These rumours are usually considered positively by investors and stocks rally. In the same fashion, when bad rumours spread, for example about earnings announcement below expectations, stock prices usually take a big hit. […]
How much would you pay for a tulip? And for a nice apartment downtown? What is going on when the market price of such an object is extremely high? Chances are you are facing a market bubble. At least once in our life, we have heard about the above-mentioned market bubbles. But what exactly are […]
Narrative Fallacy in a nutshell. As human beings, we love stories so much that we let our preference for a good story cloud the ability to make rational decisions. However, stories may negatively govern the way we think, that is we may be drawn towards a less desirable outcome simply because it has a better […]
A “compromise” between the traditional and behavioral approach Markets are efficient. This is the main underlying assumption in Economics and Finance, and it means that any asset price should reflect all the available information, stating the homonymous Efficient Market Hypothesis. Although we can have different forms of efficiency, the main concept that this theory wants […]
In the stock market, belief formation is one of the most critical challenges. In our “Finance Tuesdays” series, the first three articles are also focused on belief formation: “availability bias and investments” analyses how people estimate probability based on prevalence or familiarity, “Book review ‘a crisis of beliefs’” is about a novel interpretation of the credit cycle based on representativeness and diagnostic expectations, “Dividend anomaly” introduces mental accounting and […]
“Fools rush in where angels fear to tread.” —Alexander Pope “Why do fools rush in?” Maybe they suffer from availability bias, a simple rule of thumb or mental shortcut that causes people to estimate the probability of an outcome based on how prevalent or familiar that outcome appears in their lives. People exhibiting this kind […]
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