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Understand how Asset Prices are Affected by Human Behaviour

Human behaviour offers the best and most detailed explanation for recurring financial crises and volatile fluctuations in asset prices. Even the most seasoned investors, economic forecasters, and regulators are caught off-guard, every time we witness a collapse in asset prices or a financial crisis. In the last two centuries, the global population as seen numerous asset bubbles and financial crises. The most common denominator in all ultimate causes of these events we can think of is human behaviour. However, we will never have a crisis-free world if we do not understand how asset prices are affected by human behaviour. 

Let us understand this in a simpler way. Behavioural finance is a sub-field of behavioural economics. It proposes that psychological influences and biases affect the financial behaviours of investors and financial practitioners. In addition, influences and biases can be the source for the explanation of all forms of market anomalies and especially market anomalies in the stock market, such as severe rises or falls in stock prices.

Behavioural finance can be studied from numerous viewpoints. Stock market returns are one field of finance, where it is often believed that psychological behaviours influence market outcomes and returns, but there are several different observational angles. 

The aim of behavioural finance classification is to help understand why individuals make certain financial decisions and how those decisions can affect the market. In behavioural finance, it is assumed that financial participants are not perfectly rational and self-controlled but rather psychologically dominant with somewhat normal and self-controlling tendencies.

The influence of biases is one of the main aspects of behavioural finance studies. Biases may emerge for various reasons. When narrowing in on the study or analysis of industry or sector outcomes, understanding and classifying various types of behavioural finance biases can be crucial. Usually, behavioural finance covers five key concepts: 

Mental accounting: It defines the propensity for people to allocate money for a particular or specific purpose.

Herd behaviour: It states that people tend to imitate the financial behaviours of most of the herd. 

Emotional gap: The emotional gap states that people make the decision based on extreme emotions or emotional strains such as anxiety, frustration, fear, or excitement. Mostly, emotions are a prime reason why individuals do not make sound decisions.

Anchoring: If people spend consistently based on a budget level or rationalising spending based on various satisfaction utilities, it is referred to as anchoring. It means attaching a spending level to a certain reference.

Self-attribution: It refers to a propensity to make decisions based on confidence in self-based knowledge. Within this category, people appear to rate their information and knowledge higher than others.

The interpretation and use of behavioural finance biases can be applied to stock trading courses to learn about market movements on a regular basis. Thus, you can become an expert in sound financial trading by pursuing the Advanced Trading course from a reputed institute or college in London in just 12 weeks. Choose your online package, now!

Zaraki Kenpachi