![see finance see finance](https://www.qulix.com/wp-content/uploads/2019/12/the-role-of-big-data-in-finance-main-pic-1024x518.jpg)
Heuristic simplification refers to information-processing errors. We can also scope out a bucket that is often called heuristic simplification. When we mistakenly think we know more than we actually do, we tend to miss information that we need to make an informed decision. The concept of self-deception is a limit to the way we learn.
![see finance see finance](https://static.fmgsuite.com/media/images/80e7f11e-59d8-4fd2-977e-85b9a171753f.png)
Learn more in CFI’s Behavioral Finance Course! #1 Self-Deception We can break down the decision-making biases and errors into at least four buckets. Let’s explore some of the buckets or building blocks that make up behavioral finance.īehavioral finance views investors as “normal” but being subject to decision-making biases and errors. Investors make cognitive errors that can lead to wrong decisions.Investors are influenced by their own biases.They actually have limits to their self-control.Investors are treated as “normal” not “rational”.Now let’s compare traditional financial theory with behavioral finance. Learn more in CFI’s Behavioral Finance Course! Behavioral Finance Theory They are not confused by cognitive errors or information processing errors.Investors truly care about utilitarian characteristics.Both the market and investors are perfectly rational.Traditional finance includes the following beliefs: In order to better understand behavioral finance, let’s first look at traditional financial theory. It focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own biases. It also includes the subsequent effects on the markets. Behavioral finance is the study of the influence of psychology on the behavior of investors or financial analysts.