The power behind behavioral finance
Behavioral Finance has become a very hot topic over the last decade or so. This field examines why humans behave the way they do, which helps us better understand their decisions. In fact, many economists believe that Behavioral Finance can explain some of society’s most pressing problems, such as inequality and climate change.
What is Behavioral Finance?
Traditional finance studies what happens when you invest your money on australian online casino games, and how much risk you are willing to bear. With behavioral finance, you know this already. However, behavioral finance tries to answer questions like: Why do people buy shares? Why do people choose investments based on emotional factors? Instead of asking “Is this investment worth it?” we ask “Why does this person decide to invest?”
How can Behavioral Finance help solve our financial crises?
In traditional finance, the market always seems to find a solution to any problem, which is part of its beauty. But there are times where the system needs fixing. Take the current financial crisis, for example. Economists could have predicted that the housing bubble would burst, but no one was able to predict just how bad things were going to ge. One thing behavioral finance offers us is insight into why online blackjack players do certain things, and how the economy works. If we knew why people invested in subprime mortgages, we might have been able to figure out sooner than later that something wasn’t right. We wouldn’t have had to worry about millions losing their homes.
Why did banks go bankrupt during the Great Recession?
In traditional finance, the only time we worry about banks failing is when there’s a bank run. People want to withdraw all of their savings at once, causing the whole institution to collapse. That doesn’t happen often, since banks don’t hold a lot of money, but does happen every so often. But during the 2008 crash, banks went bankrupt without a single bank run. Banks didn’t fail because people decided not to deposit their money; instead, banks failed because investors lost faith in the value of their assets. .
Conclusion
As long as everyone follows the same rules, the economy will work fine. Some people may choose to follow certain behaviors, but these aren’t necessarily bad. Just look at Warren Buffett, who chooses