O'Reilly logo

Financial Planning Competency Handbook, 2nd Edition by CFP Board

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

CHAPTER 81 Behavioral Finance and Its Implications for Financial Advisors

Keith Redhead, PhD

Coventry University

Behavioral finance brings psychological and sociological considerations to bear on the analysis of financial decision-making. When considering decision-making, the behavioral influences can be classified as heuristic simplification, self-deception, affect, and social influence. This chapter explains and illustrates some of the behavioral finance concepts and shows their relevance to the practice of financial planning and advice.

HEURISTIC SIMPLIFICATION

Heuristic simplification becomes necessary because of bounded rationality, which is rationality that is limited by intellectual capacity. Nobody is capable of absorbing and analyzing all available information. The mind has limited capacity, and it deals with this limitation by using heuristic simplification in the form of mental shortcuts and rules of thumb. The heuristics produce psychological biases that appear to be universal and hard-wired into our brains. Some have even been found in other primates, indicating a distant evolutionary origin. It has been suggested that there may be as many as 150 psychological biases arising from heuristic simplification. The following are a few of them.

The Availability Bias is the tendency to give most attention to information that is easily recalled when making a decision. Information that is repeated, vivid, emotion-inducing, or personal will have the strongest influence ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required