Finance as an Important Sector in the Business Environment - Essay Example

Behavioral finance Introduction Behavioral finance is a branch in finance that handles finance using psychology-based theories to explain anomalies experienced in the stock market. The individuals’ decision to invest depends on the influence the stock market out comes. Market analysis will determine if individuals will purchase stock. The behavior of individuals psychologically depends on whether an individual will react to the current market structures. Finance is an important sector in the business environment hence working on the analytical aspect enables an organization to improve its stock market share (Bjorndal 67). Limits to arbitrage A limit of arbitrage is the maintenance of price at non-equilibrium for a certain period due to the restriction of funds. The market sets prices for given products which when they go low due to mispricing traders experience a low-risk profit assumes that whenever the mispricing of the public stocks. Rational firms work with professional money management firms to ensure the proper management of other people’s money. The low risk profit generates from rational traders if the equilibrium. If firms engage in arbitrage in a reaction bid, it leads to a stock mispricing extending for a period. Clients withdraw from investing as they anticipate a loss by investing. To ensure the funds are delivered on time, a manager must anticipate a loss while stabilizing a sale. A threat of this action on the corporate society works with the finance industry to supply the stock, development, manufacture, and distribution. Corporate and shareholders work together to form an ancillary business help in different stages in the supply. The finance industry deals with health hence it is about people. The industry is beneficial to the public hence remains important to the public. Products and services have saved millions of lives over the years. The profit expectancy increases with lowered losses by situations such as market fluctuations and poor investment planning (Davidson, Goldstein and Kenney 56). 2.1. Market efficiency Money put in the stock market is supposed to generate return on the capital invested. Investors try to make a profit while ensuring that they outperform the current market. Market efficiency comes with formulating efficient market efficiency. Market controls the new entrants in terms of products and services. Introduction of new products gives the option to people to live better lives enjoying a longer life. In developed countries, marketing has enhanced the spread of marketing methods such as sales people, and print advertising, which dominated the advertising industry decades ago. The success of marketing growth attributes to the investments put into the industry. Businesses work with investment industry to offer investments care to clients. This is under the law as it involves business remains responsible for the stock market provided to the public. Segmentation of the drug market rates using geography and demography also assists individuals to reach available stock for sale. The profiles of markets in developing and developed countries offer a difference in the methods of analysis. Non-communicable products form a segment for businesses to invest in. investing in the medical areas brings a safe haven for patients. For instance, products in the medical industry such as diabetes, obesity and respiratory products, and cardiovascular products have different markets compared to other products including marketing and efficiency (Francis 117). 2.2. Theory The theory of efficient marketing in behavioral finance changes the thinking methodology towards investment. The studies affect the cognitive, emotional and social economic decisions made by individuals. Rationality and equilibrium in neoclassical economics is a vast understanding of both micro and macroeconomics. The reaction of individual and firms towards purchase highly depends on the capability to provide vast information on the given trends. The paper will give a detailed study on neoclassical economics, with aspects of rationale and equilibrium. Understanding the concept of neoclassical economics is diverse on the buyer concept of understanding and the sellers need to continue great purchased. Involving various examples through theories and foundations of neoclassical economics, continued support will gain importance in bringing out the equilibrium aspects with relevant examples. Theories on labor to demographic changes vary in approaches, and this is based on the assumptions below: Individuals adhere to rational preferences depending on the outcomes associated with a given value of the purchase of products and services. The profits made by cost-oriented firms that ensure relevant information on production factors are understood in relation to rational choice theory (Fullbrook 56). 2.3. Evidence Evidence in theory of efficient marketing analyses the growth of an investment should one invest. Clients rely on evidence to ensure growth of information from marketing area to another. Neoclassical economics is a combination of microeconomics and Keynesian economics. The raw version of economics is referred to as the neoclassical synthesis, which controls the main venture to today’s economics. Various critics are placed on neoclassical economics, with many theories based on the awareness of the criteria changes in the economy (Breton & Wintrobe, 1995, pp. 12). The term was originally stated in 1990 in Thorstein Velben, in preconception study, to differentiate marginalizes in the previously made studies by Alfred Marshall. Neoclassical economics is a term used to refer to the approaches of economics in finding out income distributions, prices, outputs or the determination of pieces. This is applicable in the supply and demand that is applied in the maximization of utility by income held individuals. The characteristics if neoclassical economics is based on assumptions common to the school of thought in economics. Various studies agree to some aspects on neoclassical economics, but other approaches are considered problematic areas (Gandal, Neil and Kende 67). 2.3.1. Twin shares The Royal Dutch and Shell transport, independent companies, decided to merge with interest of the ration 60:40 while remaining independent companies. The Royal Dutch traded in the USA and Netherlands. The claim based at 60% of the sum of the two companies cash flow. The sale of shares for each company remains within the ration. This is good for both the companies. This means that buyers of a given economy will feel comfortable to relate up to a given ration on the preferred purchase of goods or services. The second assumption is based on the equilibrium effect. Consumers maximize on usage and organizations maximize on profits levels. Consumers will want to purchase goods and products that will serve the longest time. Firms, on the other hand, ensure that they increase their profits by having a maximum of sales and increased production. The third assumption is based on information access. Individuals act dependently with the impact of the full and relevant information they get with the data placed on economic changed. The above three assumptions form the foundation on neoclassical economists’ structure in the allocation of resources (Giocoli 90). 2.3.2. Index inclusions Companies get omitted from an index due to bankruptcy of a merger. The merger leads to the replacement by another firm. When stock is added into an index, the average price increased by 3.5% usually permanent. A good example is the inclusion of Yahoo in the index. Yahoo shares jumped to 24% the same day. The law of neoclassical economies puts emphasis on equilibrium where an agent of maximization is on the high. Regularities placed on the economy consider individual behavior while other aims to create vertical subjectivism. The world we live in today is dictated by scarcity. Energy, talent, knowledge, time, and many more are limited upon thus forcing us to make choices. Scarcity is what brings about Economics, which is a science of choice and a study of the way people make different choices in their daily activities. Understanding economics is valuable because it gives us peace of mind by making us understand the changes in prices, interest, output and employment. Equilibrium is the act of having a common ground. For buyers, to maximize on utility, and for the sellers, ensure complete sales in their total production (Halbert and Ingulli 112). 2.3.3. Internet carve-outs Economists go through situations where curves raise during initial public offers and drop after entering the stock list. Making an analysis on the growth of each initial public offer through the internet generates important information in stock markets. Many investors try to make money during the first periods when the share price is high. Knowledge will empower us to gain insight and understanding that involves other people’s choices and teach us valuable skills that will guide us through improving the quality of our own choices. The study of economics will improve the quality of the lives of customers and their surroundings. Economics entails Descriptive Economics where economists explain and predict the choices we make, and normative economics where economists give us advise concerning the choices we should make. It is the work of micro-economists to explain and predict people’s economic behavior. They accomplish this by observing the behavior of many people and further describing those people’s average responses to situations. Their predictions and explanations are not applicable to the actions of specific people in specific situations but to the average actions of mere large groups of people affected by such circumstances (Heller 89). Psychology The limited arbitrage theory indicates that irrational traders are powerless if they cause deviations from the fundamental value. In stock analysis, people form preferences and beliefs on systematic biases. The average group responses do not usually affect single motives, but individual actions usually reflect individual motives. Micro-economists have discovered that purchasers of goods and services consistently behave on average as if they are motivated by the desire to maximize their satisfaction. This can only mean that their behavior is consistent with maximization. Micro-economists have also found out that suppliers of goods and services consistently behave on average as if they are motivated by a desire to maximize their long-term sustainable profits. This means that they respond to situations in the same way that we would expect profit maximizes to behave. It also does not mean that their actual goal is profit maximization but that their behavior is consistent with such a goal. These long established consistencies in buyer and supplier behavior have prompted micro-economists to incorporate the assumptions of profit maximization and satisfaction maximization into their analytical structures (Mulbrandon 78). 3.1. Beliefs Models in financial marketing consist of specific agents of form expectations. Psychologists learn about people’s beliefs to stock analysis including overconfidence, optimism and wishful thinking, representativeness, conservatism, belief perseverance, anchoring and biases. The assumptions are acceptable because they are wholly consistent with the observed behavior and they yield analytical structures that are both comprehensible and powerful. This later leads to the development of understated but powerful analytical structures which a principal goal of all scientific inquiry. Buyers, as well as sellers, come together and interact in what is referred to as the market, which also happens to be a process of interaction with each product or service having its own market. Buyers and sellers interact in different ways, for example, physically, through mail, telephone, and fax or over the internet thus establishing market values of products and the quantities of products that are sold. These market values are determined by the relative scarcity. The job of markets is to find prices that an adequate supply and sales. Prices must be high enough to cover costs to the financial survival of the supplier (Yunker 93). 3.2. Preferences 3.2.1. Prospect theory The prospect theory involves understanding the model of asset prices or a trading behavior as per assumptions presented by investors. The theory motivates on the vast assumptions made on the stock analysis of given products. Suppliers should make the supply of their goods scarce through rationing which is an unfair practice in order to permit it to command a price high enough to cover costs. The government has a critical role to play in market economics although people view any intervention by the government as disruptive and counterproductive. Nevertheless, there must be rules and regulations to govern market behavior. One of such assurances is property ownership by the sellers, of their products. Profits are returns that suppliers achieve form investing in business, despite the fact that some people view profits as extra, unearned, unreasonable and unnecessary amounts that greedy merchants have tacked on to their legitimate costs when setting their prices. Businesses in the private-enterprise system are in a profit and loss system. Greedy businesses require more in the way of minimum profits than others do simply because they operate with high costs and will be less competitive in the market compared to the less greedy operators (Fullbrook 54). 3.2.2. Ambiguity aversion Application: Investor behavior While cost is a production and supply concept, price is a demand and purchase concept. The amount for which a product actually costs is sometimes referred to as price, market value and average revenue. Wants are economically irrelevant until they evolve into demands. This happens when we want something and are ready, willing, able and committed to purchasing it. The market period varies from product to product with the short run being a period where the business is stuck with the facility that it currently has. The firm may increase or decrease production form that facility but the firm may not add significantly to the facility. The short run may be several years long while for other businesses it may be just a few days. The long run, on the other hand, is a period of time long enough for businesses to significantly expand their facilities. Resources, labor and capital are production factors, which are also limited quantities that an economy has to access. Another production factor listed fourth by some economists is entrepreneurship. They use it to acknowledge the limited supply of those people with the ability and inclination to organize and operate businesses (Gandal, Neil and Kende 45). 7.1. Insufficient diversification Economists constantly observe correlated events, for example, the market price of a product should increase when the demand for that product increases. They also observe to find out if one of the increases is causing the other or if it’s classic coincidence. These two events are correlated because they happen together. Correlation can be observed, but the same cannot happen with cause. It is clear that two variables are correlated if they regularly move at the same time. If they move in the same direction then they are positively correlated, but if they move in the opposite direction then they are negatively correlated. Opportunity cost comes from every choice made by consumers. It is what the consumers choice would have been or rather what we would have purchased or what we otherwise would have done. It does not matter if what we chose involved no out-of-pocket cost because it still had an opportunity cost. Opportunities have value meaning no choice is free. It is, however, preferred that entrepreneurship, is included within the labor category as another one of many forms of managerial labor input to be precise (Francis 78). 7.2. Naive diversification Maximum productive efficiency enables us to achieve the maximum amount of output from our endowment of productive inputs even though it does not guarantee that the composition of that output will be particularly appropriate. The analysis on a production possibilities frontier is useful for illustrating the concept of opportunity cost and the related concepts of full employment, unemployment, productive efficiency, a locative efficiency and economic growth. In the economy, representation of the maximum volume of consumers’ goods that an economy can produce in a year’s time using its available factors of production while Y represents the maximum volume of producers’ goods that an economy could produce in a year’s time using its available factors of production if it produces only producers’ goods. If projected in a graph, the curve that connects points X and Y is called the production possibilities frontier. It represents all combinations of consumers’ goods and producers’ goods that are attainable per year if the economy fully and efficiently employs its available factors of production. Enough factors are reallocated away from consumers’ goods production to enable the economy to increase producers’ goods output from zero to 0.2 Y(Davidson, Goldstein and Kenney 78). 7.3. Excessive trading It makes sense for us to reallocate factors that will be extremely strong at making producers’ goods and maybe were not particularly adept at consumers’ goods production; this will permit us to gain that 0.2Y of producers’ goods without giving up any more consumers’ goods than is utterly necessary. That the sacrifice of consumers’ goods is the opportunity cost of choosing to produce the wanted number of goods in the production. All points on the production possibilities frontier such as A, B and C are output combinations that fully and productively efficiently employ the economy’s factors of production. Scarcity prevails whereby more of one kind of product can only be produced if less of the other is produced. Combinations beyond the production possibilities frontier such as point E are currently unattainable. Again scarcity prevails; the economy lacks sufficient factors to produce that much. If the economy operates at a point on its production possibilities frontier that corresponds to production of sufficient producer’s goods not only to replace capital goods that are wearing out but also sufficient to increase the existing amount of capital (Yunker 89). 7.4. The selling decision The production possibilities frontier will shift outward to reflect this as shown in the economic growth curve. Representation in a diagram of a particular combination of consumers’ goods and producers’ goods gives equilibrium. Those amounts of consumers’ goods and producers’ goods would generate a certain level of benefits to their purchasers. All combinations on the social indifference curve passing through points that yield more total benefits than do the combinations on the curve passing through point of equilibrium, because combination the production has more of both consumers’ goods and producers’ goods than combination the other production. The rationale that shows that the economy is operating on the production possibilities frontier cuts through a social indifference curve, the economy will be misallocating its productive factors and will be producing a mix of products that will yield total benefits that are less than they could have been. That the economy will concentrate on consumers’ goods, and will produce relatively few producers’ goods as depicted in studies. The former Soviet Union had a strong official preference for producers’ goods and was in a hurry to expand its industrial and military capacities, the reason why it operated near the upper end of its production possibilities frontier (Bjorndal 67). 7.5. The buying decision Combinations that occur through neoclassical economics largely depend on the international relations. International business is an extremely sensitive type of business. It is easily affected by extremely many different factors one of them being the change in value of different currencies. In the end, it enjoyed extremely rapid economic growth and increased military strength despite the fact that there were few consumers’ goods, leading to its eventual disintegration. This analysis gives importance to the continued change in economics, and the need to create concern on the earlier stated assumptions. Change in economic trends is common as purchase of the economy is regulated by the need to create competition by firms (Davidson, Goldstein and Kenney 78). Conclusion Since international business involves transaction with different currencies, trade is affected by the change in the value of these currencies. Most of the business people I have dealt with do their business using dollars. They conduct their international trade using the dollar since it’s the currency accepted by most people around the world. The fluctuation in different currencies affects international businesses in a big way. Business men and women involved in international business, therefore, need to have the best and most recent information on the behavior of the currencies that they deal with including the dollar. Sales and marketing are some business processes that comprise several activities that are designed in a way to generate customers and revenue. Fast growing economies have made it difficult for business to choose which countries to do their business. Regulatory systems for multinational companies and other firms lack thus for business to be successful it has to look for institutional voids and work with them. Works Cited Bjorndal, Endre. Energy, Natural Resources and Environmental Economics. Berlin: Springer, 2010. Davidson, Dam, Jacob Goldstein and Caitlin Kenney. "Europe’s Financial Crisis, in Plain English." 2011. The New York Times . . Francis, Taylor &. " Business & Economics." The Journal of information systems management (2002): 16-19. Fullbrook, Edward. 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