Behavioural finance is the study of how people actually make financial decisions. It looks at the psychological factors that influence spending, saving, and investing, and it helps explain why smart, rich and wealthy people still make costly money mistakes. It explains how psychology affects financial decisions.

Traditional finance assumes people act rationally however real-world choices are often shaped by emotions, biases, and mental shortcuts.

Fear, greed, and overconfidence can push investors toward poor timing, excessive risk, or panic selling.

Cognitive Biases

Anchoring, confirmation bias, and mental accounting can distort judgement and cause people to ignore better information.

Market Behaviour

Markets are not perfectly rational. Prices can be influenced by sentiment and crowd behaviour, even when the underlying data has not changed.

Behavioural finance often uses a dual-process theory to explain how people make decisions:

• System 1: is fast, automatic, and emotional.

• System 2: is slower, more deliberate, and more logical.

Tip: Good financial decisions usually require slowing down long enough to use System 2.

Losses tend to feel worse than gains of the same size feel good. This can lead to holding losing investments for too long, selling winners too early or at a loss and avoiding investing altogether.

To prevent this, the following suggestions may be helpful to reduce these effects:

• Automate savings and investing where possible.

• Use a 24-hour pause before major unplanned financial decisions.

• Set rules in advance for contributions, asset allocation, and re-balancing.

Emotional: regret aversion, status quo bias, endowment effect.

Information-based: framing, availability bias, mental accounting.

Put simply many of these psychological effects are what created the following social pressures:

• "Keeping up with the Joneses"

• "Lifestyle Inflation"

• "The Rat Race"

• "First World Poor" - Relative Deprivation

• Pecuniary Emulation

• Conspicuous Consumption.

This is what creates the need to match or exceed the spending, lifestyle or asset accumulation of others for yourself. It is one of the reason many people live pay cheque to pay cheque and is a major contributing factor in comparing oneself to others.

Remember: Comparison is the thief of joy and your financial situation does not determine who you are as a person or your personal worth.

Behavioural finance shifts the goal from predicting markets to managing behaviour. When you understand your own biases and understand yourself better, you can make smarter, wiser, steadier decisions and avoid impulsive mistakes. It also allows you to stay aligned with your long-term plans and goals. So get to know yourself better so you can make better financial decisions!