Central to improving investor behavior is correcting the irrational actions that are driven by the behavioral finance factors of:
See Detailed Discussion∞
References:
- Loss aversion: expecting to find high returns with low risk.
- Narrow framing: making decisions without considering all implications.
- Anchoring: relating to the familiar experiences, even when inappropriate.
- Mental accounting: taking undue risk in one area and avoiding rational risk in others.
- Diversification: seeking to reduce risk, but simply using different sources.
- Herding: copying the behavior of others even in the face of unfavorable outcomes.
- Regret: treating errors of commission more seriously than errors of omission.
- Media response: tendency to react to news without reasonable examination.
- Optimism: belief that good things happen to me and bad things happen to others.
See Detailed Discussion∞
References: