Behavioural finance and decision making

Do you happen to know the term “behavioural finance ”? This concept has been widely discussed in recent years within the scope of corporate finance .

As you may have guessed, behaviour-based finance is closely linked to entrepreneur/investor behaviour. That is, how he makes decisions regarding investments and the management of financial resources.

And, in fact, such decisions have a direct impact on the success or failure of particular operations and even the entire organization.

Therefore, it is important to debate this subject, knowing in more detail what behavioural finance is and how it affects decision-making. Continue reading this article from John Labunski!

What is behavioural finance?

In a very simplified way, this topic concerns the decision-making process of entrepreneurs/investors in the financial management of the business.

More precisely, this concept assesses how managers and investors act in money-related risk situations — based on their behaviour.

In fact, some people are bolder, while other managers are quite traditional in the way they conduct business.

Some take risks in high-risk investments. Others prefer to make conventional choices, even if they only give results in the long term.

What does behaviour-based finance take into account?

To reach a conclusion, this concept assesses the emotional, social and cognitive influences on people’s economic decision-making.

So, after collecting data and doing analysis, it is possible to understand why most people (entrepreneurs or not) have a complicated relationship with money.

For example, everyone understands that they shouldn’t spend more than they earn, but not everyone can put this idea into practice. The result, then, is sprawling debts, whether domestic or business.

To respond to this behaviour — intriguing to say the least — behavioural finance shows how emotion and reason can tip the balance in the economic health of organizations.

Emotionally driven decisions

The most classic decisions motivated by emotion are those that make entrepreneurs invest in a new business without doing any kind of planning.

Without understanding the market, opportunities, risks, competition and consumer behaviour, entrepreneurs venture out, ignoring the risks that this can cause in a short period.

Often, this behaviour is leveraged by the overconfidence of those who have undertaken before and obtained good results. But it’s good to remember that every business is a business and every niche is a niche.

Therefore, good results in one company does not mean that you will have good results in another type of business.

Decisions driven by reason

When only reason weighs in the balance, you can leave excellent opportunities on the table! After all, an entrepreneur with a conservative profile tends to be highly averse to risk.

However, in some cases, taking risks is essential to get out of the place and promote some kind of growth for the organization.

In addition, the excessive search for security at any cost makes many entrepreneurs lose opportunities for greater gains than they already have.

What to do to have balance in decisions?

The first step towards this is knowing that saving is an attitude that only brings benefits, whether in the business or domestic sphere.

Whoever saves always has! Therefore, in times of crisis, your company will be able to overcome the lack of cash in the cashier with more tranquillity.

Likewise, avoid the “herd” effect, such as: “My competitor is doing it. So I will too.”

Each organization has its own financial reality, and it is up to each to have its own planning and internal analysis to understand to what extent investing is a priority or not.

And it is certainly very wise for entrepreneurs to have the guidance of finance consulting professionals.

After all, a consultancy like John Labunski Safe Investment has the expertise, technical knowledge and strategic vision to help your company avoid falling into traps caused by excessive reason or emotion in business finance!

Do you want expert advice? Talk to John Labunski Dallas!