Forex Market Psychology

1. Behavioral Finance: a new area of research

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We often talk about the research in the field of behavioral Finance. Unlike traditional Finance and economy, which, in an attempt to make accurate economic projections, to consider only the specific indicators, behavioral economists assume that forecasts are prone to error.

Predictions were made by people and people make mistakes; they are “irrational”, they did not base their decisions on logical analysis of all available information. Instead they use “rules of thumb”. This often leads to inaccurate predictions.

According to behavioral economists, precisely because people are motivated by “what he wants left foot”, share prices largely reflect the “investor psychology” than traditional fundamental indicators. The work of Daniel Kahneman (Daniel Kahneman) influenced many behavioral economists. A lot of bright experiments, Kahneman and his colleague Amos Tversky (Amos Tversky) demonstrated that people are very inefficient processors of information. They do a fast and tacky action rather than based on careful logic. Some of the heuristic assumptions used to understand markets based on suitability (the belief that the action or sector will go up in price, because it’s easy to remember past similar cases) and representativeness (if the stock exhibits characteristics that are typical of the growing stock, then it will grow).

From the point of view of the physiologist is not surprising that economists are hard to make accurate predictions of the market behavior of investors is difficult to predict. Psychologists such as Clark Hull, tried to predict the behavior in the 40-ies and could not. Since they know that it is difficult to predict crowd behavior, and hence financial markets. But what we try to do economists? It seems that economists continue fruitless attempts to develop complex mathematical models to predict future market behavior. Many people believe that such models are possible to create, and at the same time considering the psychology of investing as something secondary, otherworldly. If You think so too, think on the fact that last week the psychologist Daniel Kahneman received the Nobel prize in Economics. Perhaps the award will not be persuaded by some who consider the psychology of something that is insignificant. And Nobel prize doesn’t prove the validity of the theory. However, maybe more people will seriously consider the results of investment psychology and behavioral Finance. We hope so.

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