How to Deal with Cognitive Biases in Financial Decision Making
Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesis
Highly complex decisions often have to be made with the speed of light in finance. In order to do this, decision-makers develop heuristics that sometimes have harmful side effects. In particular, many of these rules are subconscious, often connected to the workings of the human mind and how we perceive and interpret information. Cognitive psychology deals with exactly this and researchers in this field of study have found strong evidence that decision-makers are affected by various cognitive biases. By applying these results to the world of finance I come up with some concrete recommendations that should be able to correct most of these biases. Among the most important biases are the anchoring effect and different probability-related biases. I work out strategies for coping with these of two different sorts: one is to simply become aware of them and to keep them in mind during investment and the other includes rules that individuals or firms can impose on themselves.
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IdentifiersURN: urn:nbn:se:su:diva-4249OAI: oai:DiVA.org:su-4249DiVA: diva2:193716