The Psychology Behind Investment Decisions (2024)

FAQs

What is the psychological approach in investment decision making? ›

Psychological Approach

It means that stock prices are influenced by the sentiments about a company in the market. If the investors are having positive sentiments in the market, prices of the stock would appreciate even if the company is not reporting good earnings.

The study reveals that psychological factors, specifically Social Influence, Fear of Missing Out (FOMO), Herding Behavior, and Overconfidence, have a significantly and positively impact on investment decision-making.

What is the investment theory in psychology? Rusbult investment model, developed in 1980, explains why people commit to relationships, exploring how certain factors affect the development and stability of relationships.

Cyclical stocks, as the name suggests, are closely tied to the economic cycle. These stocks tend to rise and fall in tandem with the overall economy, making them a unique and intriguing investment option.

Emotional Finance examines how emotions affect financial decisions. It shows that investors' decisions can be influenced by their emotions, such as fear, greed, optimism, or regret (Loewenstein et al., 2001). Emotions can sometimes overrule reasoning and lead to judgments, not in the investor's best interests.

Investor Psychology: Influences and Effects

Emotions and cognitive biases play a role in even a well-educated investor's choices. That includes the biases listed above, as well as external factors such as cultural influences, which can impact an investor's sense of loss aversion and patience.

Accelerator Theory Of Investment, Internal Funds Theory Of Investment, and Neoclassical Theory Of Investment are three major types of investment theories. These theories can be used by representative parties to establish their views on the nature of the financial markets and make decisions to reach their broad goals.

Behavioral Investment Theory (BIT) is the third key idea in the Unified Theory Of Knowledge. It is a theory of the mind-brain-behavior relation, and it provides the metatheoretical framework for the evolution of Mind, the third plane of existence on the ToK System.

Keynes and his theory of investment. Keynes viewed investment as being determined by the MEI, and the rate of interest. The MEI is, in fact, a present discounted value of an expected stream of returns derived from the investment project. Thus investment is governed by the MEI and the MEI is governed by expectations.

The investor has to develop an investment mindset if he is serious about investing. The investor should stay invested for a long period of time for the returns to compound. The speed at which the money doubles increases drastically the more time you stay invested. This is one of the properties of compounding.

What is the mentality of an investor? ›

Just remember: the mindset of an investor is a combination of vision, discipline, resilience, and continuous learning. Beyond mere buying and selling, successful investors embody a strategic approach that enables them to navigate the complexities of the financial markets.

Investment decisions, also referred to as capital budgeting decisions, involve determining where and how much capital should be allocated to generate maximum returns.

In psychology, decision-making (also spelled decision making and decisionmaking) is regarded as the cognitive process resulting in the selection of a belief or a course of action among several possible alternative options. It could be either rational or irrational.

A psychological approach is a perspective, based on certain assumptions, about behavior. Each approach holds shared ideas about how to describe, predict, and explain behavior. In this chapter, we will discuss the major psychological approaches that pertain to development.

Financial Psychology: The Individual or Client Perspective

From an individual perspective, financial psychology encompasses practices related to managing one's financial life (that is, personal finance) and draws heavily from developmental, social, cognitive, and consumer psychology.

When making a decision, we form opinions and choose actions via mental processes which are influenced by biases, reason, emotions, and memories. The simple act of deciding supports the notion that we have free will. We weigh the benefits and costs of our choice, and then we cope with the consequences.