All the investors are not always rational and their decisions are influenced by their own biases. Clients sometimes make cognitive errors that may lead to the incorrect or ineffective decisions. Heuristic simplification comes under the concept of behavioural finance. This error or problem is concerned with effective and efficient processing of information. Individuals often rely on shortcuts as helping measures while undertaking decisions. These heuristics sometimes provide right results in a short span of time but in some cases, they might provide wrong results also. Human decisions are based on a mix of habits, instinct, emotion and reason at different places or time or under distinct situations. This mixture is not an issue if investors and financial advisers learn from their past mistakes and made a correct decision logically. The major problem is concerned with systematic bias when the investors or clients continuously repeat their previous or past mistakes. For example: A client may forecast the likelihood of a future event by undertaking his belief from identical past event but may avoid other relevant information that contradicts such beliefs. Overconfident investors do not trade frequently when they acquire information from family or friends because they think that they are above average with respect to investment skills. On the other hand, investors who are less confident trade frequently as they undertake specialised sources from where they can derive relevant information from banks and financial advisers.
A client may give more attention towards recent trends while making estimations regarding price, likelihood, etc. That means, the more often he believes that such event has happened, he is more likely to assume that it will take place again. For example: a client can be in a positive mood that may last for a day, a week or for some longer period and this might make the client’s decision-making process biased towards new active investments and thus act favourably towards those investment avenues. Mood of human beings are classified as being good or bad and this encompass all his/her activities and includes depression, anger, contentment, despair, impatience, enthusiasm, cheerfulness, glee, etc.
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