Can you explain what behavioural finance is and how it works?
Behavioural finance is the study of investors’ psychology while making financial decisions. Investors fall prey to their own and sometimes others’ mistakes due to the use of emotions in financial decision-making. Behavioural finance tries to understand how people forget fundamentals and make investments based on emotions. How does it work in the stock market? Stock prices move up and down on a daily basis without any change in the fundamentals of the companies. I call this crowd behaviour. If you see people in the stock market you will observe that they move in herds and this influences stock prices. To put it slightly different, theoretically, markets are efficient but in practice, they never move efficiently. For example, if a company announces mega investment over the next few years in an emerging area, the stock price of the company starts moving up immediately without looking into the prospects, returns or the amount of investment to be made in this project. That is how the behavi
