Abstract
This chapter introduces the behavioural underpinnings of decision-making under risk, reviewing the literature from cognitive psychology and economics in order to provide a more empirically founded picture of the investor’s mind. The chapter addresses the two stages of decision-making—information collection and processing, and the actual process of choice—showing behavioural regularities and identifying patterns of behaviour that may be detrimental to financial decision-making. Cruciani reviews the role of heuristics and the resulting biases, spanning from representativeness to overconfidence and discusses their implications in financial context. This chapter also provides an overview of the implications of a seminal behavioural model, prospect theory, and details how related concepts like loss aversion, framing effect, mental accounting impact asset allocation.
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Notes
- 1.
The weight attached to certainty (probability equal to 1) is greater than the sum of the weights attached to two probabilities that sum to 1.
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Cruciani, C. (2017). Understanding Investor Behaviour. In: Investor Decision-Making and the Role of the Financial Advisor. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-68234-1_1
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DOI: https://doi.org/10.1007/978-3-319-68234-1_1
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