How Does Behavioural Economics Influence Market Participants?

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How Does Behavioural Economics Influence Market Participants?

What Are Various Themes Of Behavioural Economics?

Three prevalent themes in behavioural economics comprise heuristics, framing and market efficiencies.

Why Is Behavioural Economics Important?

Behavioural economics provides new ways to think about barriers and drivers to a range of behaviours. This makes it significant, as traditional economic theory does not use insights from psychology, sociology and neuroscience to explain people’s decisions. So much so, behavioural economics seems to have the power to change the way economists and policymakers think about real world problems.

The field also builds a bridge between economic theory and reality- a bridge based on scientific evidence coming from disciplines in behavioural science. Some experts even regard behavioural economics as a counter-revolution, which takes economics closer to its roots, based on psychological intuition and introspection wherein psychology enacts a scientific discipline that can offer much more than merely intuitions and introspection.

Besides, understanding basic concepts from behavioural economics can be very useful. It can help people be better negotiators.

How Does Behavioural Economics Influence Market Participants?

Clearly, people don’t behave as rational, as traditional economists have assumed. They are affected by cognitive biases, are extremely influenced by other people and often practice herd mentality, have different perceptions about attitudes and behaviours.

In context to the stock market, erroneous, irrational financial decisions are the result of different unpredictable reactions by market participants subject to losses and high market risks. Therefore, for decision-making, it is essential to consider all the factors in the market-which creates a place for behavioural economics besides accounting fundamentals, macro and micro-economic factors, economic projections, etc.

Consider this- a sudden drop in the value of a few stocks followed by equally rapid recovery, demonstrates that market participants did not cause such movements by rational choices but rather emotional reactions.

No wonder Benjamin Graham, the father of value investing, and mentor of Warren Buffett the world’s best investor coined the term ‘Mr. Market.” Clearly, he understood there is more to market than numbers.

#WarrenBuffet #StockMarket #Kalkine


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