Anushka Gupta

Independent Study and Mentorship

Finance

18 October 2019

Ricciardi, et al. “What Is Behavioral Finance?” ​SSRN​, 9 Mar. 2001, ssrn.com/abstract=256754.

This article delves deep into the psychology behind finance, as suggested by the title.

Something that people may generally know that finance and economics is essentially the

psychology of business and that the economy largely rests on consumer speculation. Therefore it

is of insurmountable importance that people who are interested in finance also make an effort to

understand the psychology of it. This research paper in particular outlines some of the different

aspects of behavioral finance, such as overconfidence, financial cognitive dissonance, the theory

of regret, and prospect theory. As I was reading it, I became really fascinated with how relevant

the convergence of psychology, sociology, and economics is.

The first aspect of behavioral finance that the research paper talked about was

overconfidence. Apparently, people have a tendency to forget about errors or the ramifications of

negative decisions they have made in the past and this leads to what is known as the

“overconfidence dilema.” Additionally, it was interesting to see how this relates to gender biases.

Men are more likely to not learn from their mistakes according to the studies conducted in the

paper thus they trade more frequently, but encounter a lower return on investment. Women on

the other hand trade more cautiously and see more profit. However, this gender net wealth

imbalance as it relates to investments is not reflected in the labor force make up of the
investment management sector of the industry. Men still predominantly hold the spots in the

upper echelon of this industry and there is also a bias towards the fact that men are

predominantly traders leading to decreased confidence within the female population. The truth is,

men trade more often, but women statistically have a tendency to be the smarter investor.

The second aspect of behavior finance that this research paper covered was financial

cognitive dissonance, which is the idea that people feel inner conflict and anxiety when subjected

to conflicting beliefs, or dissonance. When investors are faced with the truth of making a bad

investment decision, they are reluctant to admit it and therefore hold onto a bad investment. This

makes me think about how if I entered the investment sector, would I face people like this? It

gets into the different personalities I might be working with and something I may adopt myself:

the withhold mistakes. Sure, no one likes to admit that they made a mistake, but at what point are

the stakes high enough to admit it? The next aspect is the theory of regret: people will make

decisions that allow them to evade regret. And this really goes hand in hand with financial

cognitive dissonance since it involves withholding poor investment decisions.

Finally, the prospect theory delineates the idea that people will not always be rational.

This seems like a very obvious notion, however, I can understand why in finance it might not be.

Money is obviously very important, but considering all of the previous theories on behavioral

finance, people can go to lengths such as omitting basic economic principles to justify their

decisions. All of the theories mentioned above happen subconsciously though, and for the most

part people are not being deliberately oblivious about their money. When it comes to finance,

there are a lot of things that are worth noting including looking at consumer psychology. After
all, they influence the economy and with whatever is going on in their minds, they can either

boost it, or plunge it.