Introduction:

In the world of investments, behavioural finance plays a crucial role in understanding how psychological biases impact decision-making. This case study examines a scenario where an investor, Mark, faces a market downturn and grapples with the decision to sell his long-term investments.

Case Overview:

Mark has been a disciplined investor with a diversified portfolio for years. However, when faced with a sudden market downturn, he experiences the emotional roller coaster common in behavioural finance. Fear and anxiety prompt him to consider selling his investments to avoid potential losses, despite having a well-thought-out long-term strategy.

Behavioural Biases: Mark's contemplation to sell is influenced by the behavioural bias of loss aversion, as the fear of losing money outweighs the potential gains. Additionally, he exhibits recency bias, giving more weight to recent market events rather than considering the historical performance of his investments.

Impact on Decision-Making: Understanding the impact of these biases is crucial for investors and financial professionals alike. Mark's potential decision to sell during a market downturn illustrates how emotions can override rational decision-making, potentially leading to suboptimal outcomes in the long run.

Learning Objectives

1. How can investors proactively manage behavioural biases like loss aversion to make more informed and rational decisions during market fluctuations?

2. What role can financial education and awareness play in mitigating the impact of recency bias, helping investors make decisions based on a more comprehensive understanding of market dynamics?