Behavioral Finance

Behavioral finance is the study "of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets". Sewell (2005).

Therefore, we could say that Behavioral finance is an exciting matter that it helps explain why financial markets are less effective, behaviorall finance emphasizes the inefficiencies of the financial markets such as under- or over-reactions to information as causes of stock market trends. A good example of these particular cases will be financial bubbles and market crashes.

Behavioral Finance, tries to explain the behavioral patterns of investors, behaviors of those carrying out financial transactions, most of time savvy investors cannot avoid acting with over-confidence, emotions or just simple impulsivity could get in conflict financial concepts. Personal expectations might not always be aligned with market expectations. Consequently, we must acknowledge the importance of the study of the theories of Behavioral Finance.

Cognitivists Daniel Kahneman Nobel prize winner for his contribution in Economic Sciences, specifically for his studies on the rationality in economics is consider the Father or behavioral Finance along with his colleague Amos Tversky. Combined, they issued about 200 pieces, most of which they include psychological concepts with effects for behavioral finance. These researchers focused much of their studies on "the cognitive preconceptions and heuristics (i.e. approaches to problem solving) that cause people to engage in unanticipated irrational behavior" (Phung, 2012) .

At this particular juncture, we would try to explain on simple terms certain Behavioral finance concepts, that will give us the opportunity to explain why and how financial decisions are made; not only on fundamental analysis but also on particular behavior traits. Behavioral finance researchers have identified these concepts have contributed to irrational and often detrimental financial decision making process.

Like a house needs a concrete groundwork to be built upon, our thoughts and views should also be grounded on solid and and accurate facts in order to be correct. Yet, this is not always the case. We Human beings have the tendency to "anchor" our opinions to a reference fact. In consequence, Anchoring prevails when we are dealing with circumstance in which we are dealing with theories that are new and different.

When investors base their investments decisions on irrelevant figures and statistics that are not clearly linked to new investments vehicles; Anchoring would definitely be a source of frustration for the new investors, as this type of behavior will stop him from the desired rate of return on their portfolio.

For example, an investor might want to take advantage of sudden drop on the value of a particular company stock hopping that this stock will regained their value shortly. Therefore, this investor would be anchoring his decision on the most prices of the stock and accordingly to the previous stock performance, he might believe that the drop in price is a good chance to buy the stock at a discount.

Mental accounting explains how regular people's trend is to separate their monies into separate accounts accordingly with their personal circumstances, preferences or necessities. According to the theory, people allocate their assets based on personal preferences and personality traits. As the majority of people use mental accounting, will be very difficult for this people to acknowledge that their behavior is far from logical. For example, some people will open a savings Bank account with only purpose to save for a family vacation or a car, while they have bills and credit cards running high balances and or paying just minimum payments. In this example, money