Behavioral economics and finance

Behavioral Economics and Finance – Cognitive Bias
Name
Institutional Affiliation
Behavioral Economics and Finance – Cognitive Bias
One of the hotly-contested debates in behavioral economics is whether cognitive bias is a result of nature or if it is a function of the external surroundings where humans live. There is no doubt as to the input both perspectives offer to behavioral, considering that each one of them has visible outcomes. Despite their relevance, it is fair to say that cognitive bias is highly intuitive and, thus, a predominant nature of human beings. It is this position that justifies the reason people appear to notice threats faster than opportunities because they are naturally inclined to protect themselves even in social interactions (Hong, Kubik, & Stein, 2004). Nevertheless, this social analysis extends to the economics involved. Cognitive bias dictates that it is not until that persons feel security against any element that threatens their existence; they are highly unlikely to proceed with the decision thereof.
An excellent example is apparent in the investments dedicated to the stock market. A household’s participation in the stock market is highly predicated upon their level of wealth (Hong et al., 2004). A family that is in this fortunate position has already met its primal necessities that are necessary for survival, which is shelter, clothing, and food as well as healthcare. They can attain these commodities with minimal or no financial pressure upon them. To this end, they have surplus income, which they can risk in the stock market. Other determinants determine the course on this path, but then, it ultimately boils down to the finances.
Besides the financial perspective, another way to perceive how much secur...