We often think only of the practical aspects when it comes to investing, such as choices with little or much capital, but have you ever imagined that our financial behaviors are not only rational? That’s what behavioral finance is all about.
We tend to think that choosing the best financial product, the term and the amount to invest are only logical decisions, but each one of us brings in a series of values that have different weights in our investment choices.
- Social values: acceptance in groups, fear of failure, the status that a successful experience can provide
- Cultural values: ideas rooted in society, the most common – and mistaken – being that only people with a lot of money can invest in funds or buy tokens;
- Emotional values: linked to individual experience or mirrored in others and which shape our way of dealing with expectations, opportunities, frustrations and risks.
BLOCKBR, a web 3.0 native company, will talk about behavioral studies in finance that allow us to understand the emotional and mental mechanisms that act in the pragmatism of investment choices!
WHAT IS BEHAVIORAL FINANCE
Behavioral finance is an area of study of the relationships that exist between psychology and economics in the economic decisions that people make.
It emerged when scholars began to realize that people’s behavior in decisions about finances did not have only the rational component, shaped by technical knowledge as an acting force.
Throughout the studies, it has been proven that a financial decision, no matter how predominant the academic bias may be, there are a number of factors that will influence it, among them:
- Cognitive;
- Emotional;
- Social;
- Cultural.
As we can see, a financial behavioral profile is an intricate network of forces that act with greater or lesser intensity on reason and lead a person to even surprising decisions.
- Those who know a lot about finances, but fail due to overconfidence and carelessness in control;
- Those with less knowledge succeed because they use discipline to foresee risks;
- Those who master financial thinking and simply don’t invest.
In each person, the factors will predominate in different scales, individualizing the behavior, but great investors and beginners in the financial market have one thing in common and that, many times, they don’t realize: reason and emotion are always present in their decisions.
EXAMPLES OF BEHAVIORAL FACTORS IN FINANCE
There are many examples of behavioral patterns that demonstrate how emotion is relevant in business decisions. Here are some of them.
- Excessive self-blame for good results;
- Being afraid of failure in front of family and friends;
- Do not subject your knowledge to the risk of loss;
- Believing that only rich people can invest;
- Drawing a mistaken parallel between investing and gambling;
- Analyze and hesitate too much to decide;
- Being overconfident and underestimating risks;
- Lacking confidence and wasting good opportunities;
- Believing in intuition or predestination to invest;
- Believing that other people always know what the best investment is.
Surely you and the people in your social circle have already acted according to one or several of these patterns. Awareness about them is the first step in not letting them prevent one from making better investment decisions.
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HOW BEHAVIORAL FINANCE WORKS
The study of behavioral finance works from behavioral profiles that help to understand where a person is putting themselves and how to review concepts to balance emotion and reason in finances.
Here are the main ones.
HERD BEHAVIOR
When we copy other people’s decisions, especially when the choice is a fad or there is mass marketing around it. It is a widely used one to provide security of choice, but with the potential risk of falling prey to scams by not digging deeper and trusting the majority trend.
OVERCONFIDENCE
Being confident when investing is fundamental, because decisions taken need to be maintained to await the results. However, many people are overconfident by past results, which is a mistake, since nothing is stable in the financial market and overconfidence cannot become a feeling.
EXCESSIVE CAUTION
It is the opposite extreme of overconfidence, and is built most strongly by past experiences, either one’s own or those of others. Excessive caution (emotional) devalues analysis (rational) by the fear of losing, which is part of the investment world and can be mitigated with study and lessons.
WHY YOU NEED TO KNOW ABOUT BEHAVIORAL FINANCE
As we have seen so far, decisions about investments are not only guided by the technical information and formal knowledge acquired. We don’t always realize it, but much of it is supported by a series of cultural, social, and emotional beliefs.
This is where the importance of knowing behavioral finance comes in to understand:
- How decisions are made – how much rational and emotional expectations weigh, what really moves you in the direction of this or that financial product;
- Because you reject some investment assets – such as the very common idea that company stocks are for people who can make and lose a lot of money;
- Because, although a certain product is interesting, you make a contrary choice – for example, you recognize the safety and profitability potential of security tokens, but create insecurity because you are swimming against the conservative current.
- What unconscious values are present in your thoughts during the analysis for investment choices and that can negatively impact the process.
In this way, you will know yourself better as an investor and will always seek a balance between reason and emotion, knowing that rationality must be the guiding thread, without letting yourself be dominated by concepts that should not weigh so heavily and looking at the best options in the market with more confidence!
HOW BEHAVIORAL FINANCE AFFECTS THE ECONOMY
To understand the potential of behavioral finance in the economy, just imagine a city where everyone practices the best possible health habits – healthy food, quality sleep, regular exercise, and mindfulness.
For sure, the city’s public health system will always be efficient, because it will have more professionals and resources available. So we can see the economy with more people who know each other as consumers and investors.
Wrong investment and consumption decisions are not good for anyone, after all, those who made a bad purchase tend to consume less to compensate for the loss, and those who lost money investing may become even more reactive to the financial market.
The results: less revenue and more conservative investments – which have appeal, but prevent people from being able to earn more.
A person aware of what moves them in their financial decisions, can feel safe to migrate from fixed income funds to agribusiness tokens and profit more.
Mastering the premises of behavioral finance helps one become an ever healthier investor, take advantage of better opportunities, and make the economy go round more vigorously!
BLOCKBR Digital Assets is a web 3.0 native fintech that brings together technological innovation and digital knowledge to transform physical assets into digital assets, in the process of asset tokenization.
The supply of physical assets and tokenized financial assets, both current and new, is democratic and decentralized, which makes the way of investing safe, simpler and more efficient.
We enable, structure, issue and offer tokens on our platform and beyond. Be aware that tokens depend on feasibility and regulatory factors.
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