Behavioral Finance: A Subject to Be Cherished

The one subject that really stuck with me long after having passed the CFA® Level III exam was that of behavioral finance.

Thanks to CFA Institute for introducing me to this new—perhaps lifelong—buddy. When I started preparing for the behavioral finance section, it didn’t come across as very interesting and didn't hold my focus for long. But by the time I finished reading the chapter, I got the full picture of the topic and its importance in decision making. No wonder it’s a topic that won a professor of psychology a Nobel Prize in Economics! This subject adds so much value, not just in finance, but in many other major fields like medicine, government, and media.

If you want to start prepping for the exam well in advance, it would be a good idea to read Michael Lewis’s The Undoing Project: A Friendship That Changed Our Minds. And if you have a little more time, a deep dive into Thinking, Fast and Slow by Daniel Kahneman will really help you approach the behavioral finance questions with confidence. The wisdom of understanding this Nobel laureate's work will be a pillar of strength for every decision in your life. Enjoy reading it…and keep reading! I got to read the two books only after the exam and realized how helpful it would have been if I’d read them earlier.

Bottom line, knowing all the biases—cognitive and emotional—along with their consequences and approaches to detection is important. I feel all the biases are like mathematical concepts. We only have a handful of them, and allocating the right focused time to understand each bias and the differences between them all will help you answer most of the questions regarding behavioral finance. 

 

About the Author:

Brindha Dhanabalan, CFA, is presently working on a technology initiative, The Practical Application of Behavioral Finance. She oversees the operation of her family-run business and guides her fellow business entrepreneurs on investment decisions and small business acquisition target valuation. Prior to this, Brindha worked on data and quality validation support for corporate reporting initiatives, implementation of Office of Foreign Assets Control (OFAC) compliance programs, and merger initiatives at Wolters Kluwer, New York. She has also worked on the roadmap design, planning, and financial forecast of technology investments for HCL’s clients.