The field of behavioral finance studies the effects of psychological and emotional factors on the economic decisions of individual and professional investors.
The central objectives of behavioral finance are to explain why market participants make irrational systematic errors, and to investigate how other participants take advantage of the market inefficiencies that result.
At Huygens, our approach is designed to protect investors from two emotional biases that contribute to poor timing decisions: loss aversion (exaggerating the potential for loss at the cost of possible gain); and recency bias (giving undue weight to recent events). Our approach incorporates our own proprietary insights in behavioral finance, particularly in the use of equity hedge pricing as a signal of institutional investor sentiment.
To learn more about about behavioral finance, see:
- This general article about the topic.
- This article about Professor Daniel Kahneman, one of the founders of the discipline.
- This article about Professor Amos Tversky, another key contributor to the system, of the founders of the discipline.
Kahneman and Tversky collaborated on a seminal paper entitled “Prospect Theory: Analysis of Decision Under Risk”.