This article begins with a series of underlying logics about investment that provide help for investment behavior. Let’s start with behavioral finance and explore new perspectives on investment and encryption!

First of all, I believe that most people who read this article must have at least a simple understanding of economics or finance, but if you have a deeper understanding of economics or finance, you will find that these theories are not very helpful in practical application.

However, the "behavioral finance" described in this chapter is a discipline that can guide our market operations from a practical perspective!

[Behavioral finance] is often referred to as [behavioral economics] or [investment psychology]. The contents of the three are roughly similar, so we don’t need to worry too much about the names.

So before we thoroughly understand this subject, we need to understand its difference from traditional finance~😀

1. Different ways of understanding the world

The essential difference between traditional finance and behavioral finance is that traditional finance is more about guidance, that is, what kind of logic the market "should" operate according to, while behavioral finance starts from reality and tells us what the market "actually is" like.

Let me give you a simple example using a joke that has been circulating on the Internet:

  • If a person can earn $10 per second, and at this moment $10 happens to fall at his feet, should he spend 5 seconds to pick up the $10?

    If it were traditional finance, it might tell everyone: He should not pick up the $10 because it would take him 5 seconds and he might lose $40.

    From the perspective of behavioral finance, it tells us: This person may choose to pick up the $10 based on some psychological factors, because he will get some kind of psychological satisfaction by picking up the $10.

    And this is the essential difference between behavioral finance and traditional finance. Traditional finance tells people what they should do, while behavioral finance tells people what people will do.

    Obviously, mastering behavioral finance can greatly help you understand what is happening in front of you, while traditional finance is more about guiding you on long-term benchmarks.

2. The fundamental differences between the two

The fundamental difference between the two is not only reflected in the different perspectives on things, but also in their different theoretical foundations. There are differences at the root, but the things they study are basically the same.

To put it simply, traditional finance and behavioral finance are essentially two disciplines derived from two different perspectives on things.

In terms of theory, behavioral finance is more of a complex subject combined with psychology, studying problems from a human perspective. Traditional finance, on the other hand, uses two underlying logics from traditional economics: the rational person hypothesis and the efficient market hypothesis.

  • 1) Rational person hypothesis

    Also known as the economic man hypothesis, in this theoretical assumption, people are selfish and will strive to maximize resources. At the same time, rational people can master the complete knowledge of the environment and conduct a completely rational analysis to seek benefits and avoid harm in order to achieve the best choice for their goals.

  • 2) Efficient Market Hypothesis

    The establishment of this theory needs to be based on the assumption of rational people. This theory believes that investors in the market are rational enough to respond quickly and reasonably to market news, so that they can obtain excess profits far exceeding the market return level from the market through a series of analytical methods;

From the perspective of behavioral finance, there are almost opposite views on the above two main hypotheses, but behavioral finance is more about refuting these assumptions based on the actual market.

3. Characteristics of behavioral finance

The above is a brief introduction to the main differences between behavioral finance and traditional finance. At the end of this article, let’s focus on the characteristics of behavioral finance.

First of all, behavioral finance can be divided into two disciplines: behavioral (psychological) and finance (as we have already introduced above, behavioral finance is a complex discipline).

The word "behavior" was originally taken from the behaviorism school of psychology. After more than half a century of improvement, it has become a set of disciplines with practical significance. The theoretical basis of this discipline is to study the various possible behaviors of people in the market, which is why this discipline has practical significance.

Behavioral finance has unique advantages in formulating trading strategies. Most of the quantitative trading strategies on the current market are based on behavioral finance as their theoretical foundation.

High practical significance is the biggest difference between this discipline and traditional finance/economics, and it is also the significance of this series. In the future, the content of this series will be developed from the perspectives of its main characteristics: differences in market thinking, cognitive psychological biases, market phenomena, and practical strategies.

This is a series of articles. I hope to develop and summarize some investment strategies suitable for the market from the perspective of behavioral finance combined with Crypto~