In our daily lifestyle, we encounter various types of products, and while dealing with them, we decide their value and thus decide whether to make certain financial decisions. In a purchase of a particular product or service, one can imply the emotion involved in that action or also the macroeconomic factor that can influence the financial decision of a person.
All of these understanding one can have when they know how our brain works when it comes to money and how certain times, it can lead to irrational decisions that ruin the rationality behind spending and create biases in our brain.
In this blog, we will look into some of the parts of behavioral finance and how, without understanding it leads to irrational behavior in the system.
- The Loss Aversion Behaviour
Loss aversion habits are ingrained in human psychology, where they cut the losses in their minimum form and look out to protect the funds. However, due to this behavior, one might lose the opportunity to gain something big as it involves risk.
For example, an entrepreneur who is looking to start a venture needs to look for a loan through a DSA partner app, and that will eventually help them to make some huge profits if they are successful in the venture. Losses are something that we all avert from, but some take the risks, and that leads to upside potential.
- Bias Due to Overconfidence
One of the common biases that one tends to develop is the bias one has due to overconfidence, and that sometimes leads to scrupulous financial decisions where one invests out of overconfidence and then loses a heavy sum due to it.
For example, a person who doesn’t know the standard of the business or chooses to invest in some stocks without proper research then they have the chance to lose the capital as it can lead to potential losses that happen due to a lack of knowledge about that particular instrument.
- Bias Due to Anchoring Effect
We all tend to believe in the anchoring effect, and that happens when one relies heavily on first-hand information. For example, for a person who is choosing an investment vehicle where they rely on the source and make a purchase decision for them, it becomes effective to take control of the act, and that sometimes leads to financial loss.
Anchoring bias also comes from a close friend that refers to a tip and a person through that starts to act on that information so that they can have gains as their source is telling them.
- The Effect Due to Herd Mentality
The herd mentality is the choice that people make when they follow all the other participants in the market and make some purchase decisions. For example, a new real estate project has come to the market, and if you are an individual who loves to invest in real estate and make a purchase decision without due diligence, then it shows a clear sign of herd mentality.
For example, one might have the hunch to go in a different route and start a venture for which they can consult with a DSA for financial support. A DSA’s full form is a Direct Selling Agent, and they are the ones who can guide an individual about loans and types of financial products that are effective for starting a new business.
- Bias Due to Availability
Availability is one of the factors that influence a person to purchase certain products when they feel that they are available right now. It’s a great tactic used by marketers to create a fear of missing out and that pushes an individual to make a purchase decision.
It often leads to making short-term decisions where a person is more focused on getting the item right now rather than considering the utility value of the item.
- Having Confirmation Bias
It’s one of the dangerous biases where one makes their conviction strong only by searching for information tht supports their viewpoint and also makes a person feel confident about their decision.
It stops a person from looking at an alternative strategy, and thus, it makes a person closely believe one particular thing or data and take money decisions based on that.
These are some of the biases that come into play when one needs to make a decision where it involves money.