Can investing and traditional economics models be impacted by human behaviour? Research says YES.
Not convinced? Let's learn from a few legends in Behavioural Finance - authors; Dan Ariely, Robert Shiller, Richard Thaler (all Nobel Prize winners).
I loved this topic so much that I previously politely declined a brilliant London College of Fashion offer and completed a Masters in Behavioural Finance instead 🎓
A key pillar of economic theory is the notion that investors are rational (this is a classic economic model assumption). Behavioural Economics/Behavioural Finance turns traditional theory on its head through showing that we are not actually as rational in terms of thought, behaviour and ultimately in our decision-making.
Would economic theory be more accurate if it accounted for how people actually behaved? I'll let you be the judge.
Here are 3 books that have helped my understanding of Behavioural Finance👇
☑️ Reading this felt like I took a crash course in how our minds work. Both the rational and irrational nature of being human.
☑️ Full of thought provoking concepts that make you rethink how you behave. Three such concepts I liked are;
⭐️"Endowment effect" - We overvalue what we have.
⭐️ "Loss Aversion" - People value losses far greater than gains. Imagine the feeling of gaining £1,000 versus losing £1,000. Research indicates that losses loom larger than gains when comparing how people think/feel about it. This would be interesting to consider when applied to investments, particularly when viewing portfolio volatility.
⭐️ "IKEA effect" - People place higher value & ownership on something (e.g. product) if one helped to create.
☑️ Interested in understanding our behaviour? Read this.
☑️ The term 'Irrational Exuberance' refers to people/investors excitement drives prices of assets higher than their fundamental value. Does this sound familiar?
☑️ The term was coined by Alan Greenspan (ex-Fed Chair) referring to the dot-com bubble.
☑️ This looks at financial market bubbles and historical stock market stories coupled with data to identify bubbles.
☑️ Author and Yale professor Robert Shiller is also known for warning about bubbles before the 2008 crash. Perhaps we can learn a thing or two from historical events as we look to the future.
☑️ Follow the journey of a key founder of Behavioural Economics (i.e. the great Thaler himself) and learn how to avoid making errors arising from irrational decision-making.
☑️ Discusses stock market mispricing coupled with the occasional experiment disproving traditional economic theory. Should such classic theory be upgraded to more modern times?
☑️ This was one of the many books marked as prescribed reading for my Masters, along with the infamous 'Thinking Fast and Slow' by Kahneman!
☑️ I liked the blend of academic research, key behavioural economics concepts, semi-biography and non-fiction style of writing
Enjoy the read, enjoy the journey.
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