Mind your behaviour

Hedge fund managers are becoming interested in behavioural theory, anincreasingly influential branch of economics that describes the role of intuitivebias in investment decision-making. According to one finance professor,behaviouralism provides valuable lessons for hedge fund investors, and offersthe best account for the demise of LTCM.

Behavioural finance applies the discoveries of psychology to investment decision-making. It says investors are not rational – they have many irrational biases that influence intuitive decision-making. It has become an increasingly popular field, influencing both economic science and investment practice.

In 2002, psychologist Danny Kahneman was awarded the Nobel Prize for economics for integrating “insights from psychological research into economic science, especially concerning decision-making

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