What is Behavioral Finance?
Behavioral Finance is a study that believes that there is a psychological influence that influences investors in investment decision making.
The psychological aspect is moreover considered to cause investors to carry out irrational and unpredictable matters.
Sometimes emotions, dispositions, knowledge, preferences, and various subjects that attach to the human being underlie the emergence of decisions in the role.
This makes them run out of self-control, where they become very confident or even become very pessimistic.
Psychological Aspects of Investors in Making Decisions:
1. Cognitive Bias
Cognition is the process of description, processing, conclusion of a data or reality. As the name implies, cognitive bias describes the absence of deviations or weight caused by data owned by investors.
Types of Cognition Bias:
▪ Representativeness Bias: Investors take very lightning investment decisions without in-depth analysis. Usually investors only rely on future experience that is thought to be a reference to investment decisions at this time.
▪ Anchoring & Adjustment Bias: Investors only refer to one particular data as the basis for investment decision making.
▪ Availability- Bias: Investment decisions that are tried simply for convenience and availability. What is very easy and there to try, such is the final decision of investors. And often investors believe that other investors also certainly carry out the same subject with him.
▪- Attribution Bias: Investors think the success of their investments is purely thanks to their own expertise in predicting and analyzing. If failure is established, investors will always blame the external aspects.
▪ Illusion of Control Bias: Investors are confident that they have full control over the achievement of their investment performance.
▪ Conservatism Bias: Investors tend to impose early evaluations and deny the change in circumstances that are intertwined over their investments. This makes investors react to the latest data or reality.
▪ Confirmation Bias: Investors tend to only look for data that supports their thinking on investment decisions and ignores data that contradicts their thinking.
Hindsight Bias : Investors tend to just remember and exaggerate the success of the investment experience in the future, but forget about the failures that have been established.
2. Emotional Bias
In contrast to cognitive biases that focus on data as well as knowledge. Emotions focus more on feelings and spontaneity than reality. Thus, emotional bias describes the error of decision as ignoring reality.
Kinds of emotional biases:
▪ Overconfidence Bias
: Investment decisions are tried because of the investor's self-confidence that is very late on predictions and data owned.
▪ Aversion Loss Bias: Investors feel the consequences of investment losses outweigh satisfaction with investment returns. As a result, investors are willing to continue to maintain unprofitable investments.
▪ Self- Control Bias: Investors are not disciplined with the process and investment objectives that they have made themselves.
▪- Quo Bias: The feeling of security experienced by investors for him does not want to change or implement investment adjustments.
▪ Endowment Bias: Investors take into account intangible investments, and maintain them whatever the conditions.
▪ Regret- Aversion Bias: Investors are worried about making investment decisions because they are worried about unintended consequences that could become intertwined.
▪ Greed Bias: The willingness to continue to make a profit, although it must exceed the limits of investment expertise possessed by investors.
A Strategy that Investors Must Observe So As Not to Make Wrong Decisions:
1. Implement Comprehensive Data Analysis
Investors who think rationally usually want to carry out analysis first before making investment decisions. The analysis tried among others is to pursue the fundamental financial statements of the industry, and evaluate the performance of the industry business. The goal is nothing but so that the investment decisions taken can share the maximum satisfaction.
2. Identify Risk Tolerance Levels
Just before you sort out an investment instrument, you need to carry out a simple analysis of your individual risk profile. Risk profile can be a benchmark of your readiness to accept losses that can be intertwined in investing. One of the principles of investment is High Risk High Return, which means it continues to be a big risk that you face, continues to be a big profit that you can get.
3. Strategic Asset Allocation
Strategic asset allocation is the procedure of allocating several asset rations in match the formulation of investment. The formulation is tried to fit by considering the investment objectives of each investor, thinking about the time horizon, tolerance to risk, as well as expected returns.
4. Rebalancing Portfolio Periodically
Rebalancing is a strategy of re-familiarizing the allocation of portfolios to match the investment objectives of investors. When starting to invest, investors must have investment objectives including how long the investment period and how much return is targeted. After recognizing the investment objectives, investors can allocate their capital to various investment instruments matching their risk profile.
5. Have a Personal Financial Planner
Working with financial planners can help investors identify and master the biases and tendencies of their own people's attitudes. By mastering the universal financial mismanagement attempted by investors, qualified financial planners want to hold clients to an impulsive role and relieve emotions shortly before making their investment decisions. Financial planners can also help investors come up with strategic and tactical investment plans tailored to people.
conclusion:
The main aspect of making investment decisions is peace of mind. Many experienced investors master that success comes from its ability to withstand emotions. By equitably mastering your risk profile, recalling your investment objectives, and adhering to your strategy implementation plan, you want to feel much more confident in your investment expeditions and less likely to carry out the universal financial mistakes tried by new investors.
And thus, you can stay away from investment decision making based on that bias.