The Role of Group Psychology in Behavioural Finance: A Research Starting Point for Banking, Economic, and Financial Hist
This paper discusses the significance of group psychology within the field of behavioural finance in order to provide a starting point for researchers in banking, economic, and financial history. Some of the major themes of behavioural finance are present
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Introduction
Banking, economic, and financial historians would benefit from gaining a stronger grasp on the psychology inherit within the financial markets and a better understanding of the decision-making process applied by all types of economic participants. However, most historians have never been made aware of the existence of the various biases that are present each day within the financial markets. Behavioural finance offers a new perspective on finance by examining the cognitive issues (rules of thumb or mental mistakes) known as heuristics and emotional biases. In various laboratory experiments and questionnaire-based studies within the social sciences and business fields, findings have demonstrated that all types of individuals—including both novices and experts—tend to be influenced by these different types of biases. Historians would enhance their V. Ricciardi (*) Business Management Department, Goucher College, Baltimore, MD, USA e-mail: [email protected] © The Author(s) 2017 K. Schönhärl (ed.), Decision Taking, Confidence and Risk Management in Banks from Early Modernity to the 20th Century, DOI 10.1007/978-3-319-42076-9_12
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research by exploring the role of group behaviour associated with themes of behavioural finance. This involves addressing issues of overconfidence, herd behaviour, the psychological aspects of speculative behaviour, and investor group behaviour in organisational settings (e.g. group polarisation and groupthink) as potential causes of various events and time periods within banking, economic, and financial history. These considerations can open up new perspectives on historical sources and stimulate new narratives. Of course it is still open to question whether these biases can be applied to actors in the past.
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What Is Behavioural Finance?
Behavioural finance is an interdisciplinary field based on theories, biases, and research methods from the diverse decision-making sciences of psychology, economics, and neuroscience (Ricciardi 2006). Behavioural finance focuses on the role of mental factors and emotional influences on individuals, groups, organisations, and markets. These biases are not only accidental types of behaviour; on the contrary such outcomes are rather systematic missteps that individuals have a propensity to repeat time after time (Baker and Ricciardi 2014a). The following provides an overview of some important themes of financial behaviour, including: • Investors’ unwillingness to admit bad judgement or mistakes; • Individuals exhibiting severe levels of loss, worry, and regret; • Individuals using cognitive tools or mental shortcuts known as heuristics, during the decision-making process; • Investors revealing excessive levels of pride, greed, and overconfidence; • Investors experiencing a loss as being twice as painful as an equivalent gain; • People being afraid of making a mistake and then appearing irrational to others; • Investors failing to measure their investment time horizons accurately; and • Individuals having a d
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