Stock Market · Mind over Markets

Behavioural finance

Classical economics assumes humans are rational optimisers. Behavioural finance proved otherwise: humans are predictably irrational. We make systematic errors in money decisions. The same errors, generation after generation.

The field's origins

Daniel Kahneman and Amos Tversky's research in the 1970s and 80s showed that:

• Losses feel 2x as painful as equivalent gains
• We overweight rare events (lottery, plane crashes)
• We underweight ordinary events
• Our preferences change based on how questions are framed
• We can't even define what 'rational' means consistently

Kahneman won the 2002 Nobel Prize in Economics. His book 'Thinking, Fast and Slow' is essential reading.

Two-system thinking

System 1: fast, automatic, emotional. Recognises faces, drives cars, judges trades 'on feel'.

System 2: slow, deliberate, analytical. Solves math, plans retirement, checks if a trade fits your rules.

Most investing decisions get made by System 1, and System 1 is where biases live.

> The rich don't get rich because they're smarter. They get rich because they have systems that override their System 1 reactions.

Why this matters for investing

Every market crash and bubble in history involves the same set of cognitive biases playing out at scale:

• 1999 dot-com bubble: herd mentality + recency bias
• 2008 housing crisis: anchoring + overconfidence
• 2021 crypto mania: FOMO + narrative bias
• Every individual investor losing money: some combination of these

What this module covers

20 core biases, with examples from Indian markets. Recognising a bias is the first step to defeating it. Once you can name what you're feeling, you can decide whether to act on it.

The goal isn't to eliminate emotion (impossible). It's to add a layer of awareness so your strategy survives your psychology.

Takeaway. Behavioural finance shows humans are predictably irrational with money. Two cognitive systems: fast/emotional (System 1) and slow/analytical (System 2). Most investment mistakes happen when System 1 overrides System 2. The cure is awareness + written rules.