The study of Financial and Investment Decision Making is concerned with all aspects of individual and group decision making regarding finance and money. This encompasses both retail and consumer decision making – our savings, pensions, budgets etc. as well as professional decision making – trading, fund management, equity markets etc.

Does Financial decision Making Differ from Normal Decision Making?

During the course of our everyday lives our senses are subject to enormous volumes of information, and to cope with this large amount of information, we have developed fast track cognitive processes that enable us to make decisions about simple tasks with little or no conscious awareness.

As an example, if we think about a routine journey, such as travelling to work, we may have committed the route to memory and be able to carry out the task with little or no preparation, but do we recall many details such as cars passing us by, or road signs etc. the chances are we don’t, these things pass through our minds, we would only recall details if they turned out to cause a memorable event.

This, hard wired, fast track processing is a huge advantage, as it enables us to deal and sort information and make the rapid series of decisions about everyday tasks without over taxing our minds.

However, when it comes to making financial and investment decisions, the ability to make logical, rational and probabilistic assessments is more valuable than making decisions quickly. Unfortunately, our natural tendency to fast track information often counters the need for more considered rational decision making and this can be problematic and unprofitable.

When scenarios arise that normal decision making processes are not optimum, they can be labelled biases and identifies ad irrational behaviour. The areas of research concerned with identifying and understanding these situations are called Behavioural Finance and Behavioural Ecinomics.

Behavioural Finance

"Behavioral finance is the study of how psychology affects financial decision making and financial markets."
Hersh Shefrin (2001)

• Identifies and explains those scenarios where decision making can be described as ‘irrational’ or ‘biased’
• Increasingly influential as it highlights the gulf between expected behaviour and the reality of human reactions

Behavioural Economics

“Behavioural Economics is a discipline that is interested in the same questions as economics without assuming that people are rational”

Dan Ariely, Duke University

• Popularised by the book ‘Nudge’ which uses BE to facilitate behavioural change
• Has become synonymous with “Nudge” and “Choice Architecture”