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Exploring the Anomalies of Behavioural Finance

JULY 7, 2015

 

Behavioural finance is an important field to help understand decision-making in financial markets. In this workshop, Professor Jim Engle-Warnick presented an overview of the foundations of behavioural finance, including results from recent experiments, and conducted an interactive experiment that focused on the decision-making biases which affect financial decisions.

Finance and economics rely on the notion that individuals are rational in their decision-making. However, many scholars emphasize that psychology underpins behaviour, decision-making and the ability to think rationally.

Through conducting a series of experiments with workshop attendees, Professor Engle-Warnick demonstrated various decision-making anomalies which are not consistent with economic theory. Most people are risk-averse when they expect a positive outcome, and prefer to take risks when their choice may involve a definite loss.

Professor Engle-Warnick explained biases that influence financial decision-making. For example, individuals will consider what they believe others will decide as a factor when making their own decisions. He also impressed the important role trust plays in financial markets.

The next step in this project will study the risk profiles of financial professionals and assess how their risk preference influences the decisions they make on behalf of a client.

GRI members can access the workshop report, podcast, and presentation slide deck by clicking here.