Continue reading...According to traditional financial and economic theories investors are assumed to be rational actors, seeking to maximize their wealth in logical ways. But in the real world investors and traders often act irrationally and unpredictably, often to their financial detriment. Behavioral finance is a discipline that blends psychology and finance to help explain why investors act the way they do. Over the last few decades behavioral theorists have identified a set of cognitive errors repeatedly committed by financial market participants. By understanding some of behavioral finance’s key concepts, traders can avoid some of the common pitfalls that can wreak havoc on their account balances.
Loss aversion and the disposition effect
It should come as no surprise that people feel pleasure when they win and pain when they lose but what might surprise you is that the psychological impact of wins and losses of the same magnitude is not the same. According to research conducted by...
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