Taking a look at a few of the thought processes behind making financial decisions.

The importance of behavioural finance lies in its capability to describe both the rational and unreasonable thinking behind numerous financial processes. The availability heuristic is a principle which describes the mental shortcut through which people assess the likelihood or value of affairs, based upon how easily examples come into mind. In investing, this frequently results in choices which are driven by recent news events or stories that are emotionally driven, rather than by thinking about a broader interpretation of the subject or taking a look at historic data. In real world situations, this can lead financiers to overestimate the possibility of an occasion occurring and develop either a false sense of opportunity or an unwarranted panic. This heuristic can distort perception by making rare or extreme occasions appear far more common than they actually are. Vladimir Stolyarenko would know that in order to neutralize this, financiers need to take a purposeful method in decision making. Likewise, Mark V. Williams would know that by utilizing data and long-lasting trends investors can rationalize their judgements for better outcomes.

Behavioural finance theory is a crucial element of behavioural economics that has here been commonly looked into in order to discuss a few of the thought processes behind monetary decision making. One intriguing theory that can be applied to investment decisions is hyperbolic discounting. This principle refers to the propensity for people to choose smaller, immediate benefits over bigger, delayed ones, even when the delayed rewards are significantly better. John C. Phelan would acknowledge that many people are affected by these sorts of behavioural finance biases without even knowing it. In the context of investing, this bias can severely weaken long-lasting financial successes, leading to under-saving and spontaneous spending practices, in addition to developing a priority for speculative investments. Much of this is because of the satisfaction of reward that is instant and tangible, resulting in decisions that might not be as favorable in the long-term.

Research into decision making and the behavioural biases in finance has generated some interesting suppositions and theories for discussing how individuals make financial choices. Herd behaviour is a widely known theory, which explains the psychological propensity that many individuals have, for following the actions of a bigger group, most especially in times of unpredictability or fear. With regards to making financial investment decisions, this frequently manifests in the pattern of individuals purchasing or selling possessions, simply because they are seeing others do the exact same thing. This type of behaviour can fuel asset bubbles, where asset values can rise, typically beyond their intrinsic worth, along with lead panic-driven sales when the markets change. Following a crowd can offer an incorrect sense of security, leading financiers to buy at market highs and resell at lows, which is a rather unsustainable financial strategy.