What are some theories that can be applied to financial decision-making? - read on to find out.

Behavioural finance theory is an essential element of behavioural science that has been commonly investigated in order to explain a few of the thought processes behind monetary decision making. One fascinating theory that can be applied to investment decisions is hyperbolic discounting. This idea describes the propensity for people to favour smaller, instant rewards over bigger, delayed ones, even website when the delayed rewards are considerably better. John C. Phelan would recognise that many people are affected by these types of behavioural finance biases without even realising it. In the context of investing, this predisposition can badly undermine long-lasting financial successes, leading to under-saving and spontaneous spending habits, along with developing a priority for speculative financial investments. Much of this is because of the satisfaction of reward that is immediate and tangible, leading to choices that may not be as favorable in the long-term.

The importance of behavioural finance lies in its ability to describe both the rational and unreasonable thought behind numerous financial processes. The availability heuristic is an idea which explains the mental shortcut through which people assess the likelihood or value of happenings, based on how quickly examples come into mind. In investing, this typically results in decisions which are driven by recent news occasions or narratives that are mentally driven, rather than by considering a more comprehensive interpretation of the subject or looking at historical information. In real world situations, this can lead financiers to overestimate the probability of an occasion happening and produce either an incorrect sense of opportunity or an unwarranted panic. This heuristic can distort perception by making uncommon or severe events seem much more typical than they really are. Vladimir Stolyarenko would understand that in order to combat this, investors should take a deliberate method in decision making. Likewise, Mark V. Williams would know that by using information and long-term trends investors can rationalise their judgements for better results.

Research study into decision making and the behavioural biases in finance has brought about some fascinating speculations and philosophies for describing how people make financial choices. Herd behaviour is a well-known theory, which explains the mental tendency that many individuals have, for following the actions of a bigger group, most particularly in times of uncertainty or fear. With regards to making financial investment decisions, this typically manifests in the pattern of individuals buying or offering assets, simply since they are seeing others do the same thing. This kind of behaviour can fuel asset bubbles, whereby asset prices can increase, typically beyond their intrinsic value, as well as lead panic-driven sales when the markets change. Following a crowd can provide a false sense of security, leading investors to buy at market highs and resell at lows, which is a rather unsustainable economic strategy.