Question

Even if behavioral biases do not affect equilibrium asset prices, why might it still be important for investors to be aware of them?

Answer 1

Behavioral biases are driven by emotions and feelings of investors. Emotionally made investment decisions lead to too much risk-taking or under-diversification of their portfolio. Some cognitive errors such as conservatism bias lead investors to use old information for decision making and ignore any new information that is relevant.

So, it is important to take emotions out of our decision-making process. Some behavioral biases can be eliminated or minimized while we can adapt to some other behavioral biases.

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