The ins and outs of behavioural finance
Behavioural Finance is a relatively new field of study that looks at how our emotions and psychological biases affect our decision making. Amos Tversky and Daniel Kahneman, winners of the 2002 Nobel prize in Economics, helped develop this field of study with their development of Prospect Theory.
Prospect Theory was developed as model of human judgement and decision-making and attempts to explain how people manage risk and uncertainty. Tversky and Kahneman found that people’s attitudes and responses varied when faced with the prospect of gains versus losses. They found that while investors are inherently risk-avoiding, when faced with the probability of losses, investors can become risk-seeking in their efforts to avoid taking losses.
Traditional economic and financial models and theory is based on the assumption…