In broad terms, traditional finance theory assumes we make decisions in a rational and unbiased manner. Whereas, behavioural finance theory states that this in fact isn’t always the case.
For example, when making decisions that affect our financial wellbeing, there can be a behaviour gap between what we potentially should do and what we actually do.
Cognitive bias can play a part in this behaviour gap. Importantly, the influence of cognitive bias isn’t limited to investing – it can extend to, for example, consumer spending, saving for retirement and purchasing of insurance.
In this animation, we illustrate loss aversion, a cognitive bias that can influence our decision-making. Loss aversion is the tendency to prefer avoiding the pain of losses more than the reward of gains.