Behavioral finance - Coursework Example

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Investment decisions are normally influenced by psychological and sociological factors, leading to the creation of various biases in investment decisions…
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Behavioral finance
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Download file to see previous pages To establish the influence of cognitive, affective and social aspects on investment decision making, and the role of psychological and social factors in financial market behaviour, this essay discusses what might cause perceptions of risk to be inaccurate,.
Risk is an amalgamation of the probability or frequency of occurrence of a distinct hazard and the magnitude of the consequences of the occurrence (Botterill & Mazur, 2004, p.1). It defines how often a particular harmful event is expected to occur and consequences that such an occurrence is expected to cause. In terms of investments, risk may be defined on the basis of the amount of loss expected to be incurred when an adverse occurrence happens or is expected to happen frequently. Therefore, perceptions of risk are constructed on the basis of individual beliefs, societal perceptions and expert perceptions.
Most people perceive risk as a possibility of bad outcome, whenever a choice is made. Therefore, in many instances, risk taking is not regarded as a potentially positive activity. However, there are instances, though few, where risk taking is perceived as a positive activity, with the potential of creating benefits to an investor. There are significant gaps between perceived risk and measurable probabilities of risk. The evident widely acknowledged differences between perceived risk and actual risk suggests that in most cases; perceptions of risk are inaccurate. This is evident when significant differences are recorded in terms of what is perceived and what actually happens in terms of real investment risks (Botterill & Mazur, 2004, p.3). Therefore, various people understand and respond to risk in various ways, based on psychological and social factors surrounding them.
One of the factors that influence perception of risk, and most probably leads to an inaccurate perception of risk is the ...Download file to see next pagesRead More
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