This subject explores the concepts of Behavioural Finance to understand why the decision heuristics (e.g. rules-of-thumb) and occasionally cause people to make mistakes in financial decision-making. People know better but get blindsided by biases. Hence, the discussion leverages theories of finance and economics to explain: how a logical and rational decision-maker occasionally succumbs to his or her irrationality; and how collective irrational exuberance can explain the economic ‘anomalies’ experienced periodically in financial markets.
This subject departs from the rational and analytical discussions often taught in other finance and economics subjects. Instead, this subject discusses the emotions and emotional reactions that are part of a client’s decision to accept or reject financial advice. As well, discussion raises awareness of how a financial planner may inadvertently exacerbate their clients’ decision biases.