Development of Behavioural Finance Behavioural finance deals with the study of the effects of various social, emotional and cognitive factors that affect the financial decision making of individuals. The major concern of behavioural finance is to track down why individuals operating in a market tend to make the choices they make…
Download full paperFile format: .doc, available for editing
Extract of sample "Development of Behavioural Finance"
Download file to see previous pages
This was followed by Selden’s ground breaking work on the stock exchange where he attempted to explain people’s financial behaviour in the stock exchanges (Selden, 1912). Further work on behavourial finance continued through the efforts of psychologists such as Leon Festinger who introduced the concept of cognitive dissonance (Festinger et al., 1956). The more modern trends in behavourial finance were placed by Tversky and Kahneman who introduced the availability heuristic that delineated the financial probability of decision making by a person (Tversky & Kahneman, 1973). This idea was followed by another expected utility theory that critiqued the original theory. This new theory delineated a descriptive model of decision making when faced with risks. The emerging model was espoused as the prospect theory (Kahneman & Tverksy, 1979). The prospect theory presented by Kahneman and Tversky has also been suggested as the alternative financial explanation for people making less than expected decisions in a risky market situation. The sixties saw the application of cognitive psychology to the processing of information by the brain. This stood in contrast to behavioural models. The newly emerging cognitive models were being compared to each other such as those presented by Ward Edwards, Daniel Kahneman and Amos Tversky. This was augmented by the development of mathematical psychology that began to link up transivity of individual preferences to different kinds of measurement scales (Luce, 2000). These developments were augmented with the introduction of newer concepts such as overconfidence that forces individuals to make irrational choices which lead to poor financial decision making (Kahneman & Diener, 2003). The bounded rationality projections in behavioural finance project that individuals act to maximise satisfaction rather than utility through their financial decision making even though it may lead to a loss (Gigerenzer & Selten, 2002) (Tsang, 2008). Over the years, various kinds of psychological traits like projection bias, overconfidence, limited attention and the like have been used in behavioural finance models. The domain of inter-temporal choice has also had various applications of behavioural finance which tend to use various kinds of psychological factors to explain basic models of rational choice. Active Portfolio Management versus Passive Portfolio Management Fund managers carry out active portfolio management so that the portfolio investments tend to outperform a particular investment benchmark index. In contrast, fund managers who are not looking to outperform any investment benchmark index try to invest in funds that replicate previous weightings and returns. This technique is labelled as passive portfolio management (Malkiel, 1996). Passive portfolio management is the most preferred investment technique on the equity market but it is gaining wider acceptance in other investment fields. The contention behind passive management is to reduce transactional costs as well as investment risks so that the investor’s output increases. In the modern economy it is common for funds to be managed with the original fund owners relying on fund managers to take investment decisions. According to Cuoco and Kaniel (2009), in 2004 the total amount of managed mutual funds exceeded $8 trillion, hedge funds totalled $1 billion and pension funds totalled more than $12 billion in the United States alone. It has also been
...Download file to see next pagesRead More
(“Development of Behavioural Finance Essay Example | Topics and Well Written Essays - 1250 words”, n.d.)
Development of Behavioural Finance Essay Example | Topics and Well Written Essays - 1250 words. Retrieved from https://studentshare.org/finance-accounting/1452002-behavioural-finance-and-active-portfoliio
(Development of Behavioural Finance Essay Example | Topics and Well Written Essays - 1250 Words)
Development of Behavioural Finance Essay Example | Topics and Well Written Essays - 1250 Words. https://studentshare.org/finance-accounting/1452002-behavioural-finance-and-active-portfoliio.
“Development of Behavioural Finance Essay Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.org/finance-accounting/1452002-behavioural-finance-and-active-portfoliio.
The researcher states that behavioral finance examines how the human animal reacts in a financial system theoretically devoid of any emotions. This has been referred to in the past as ‘open-minded finance’ which is a generous expression implying that many investors often behave in a quite contradictory manner to the advice given them by their financial advisors. ‘Proponents of behavioral finance contend that people may not always be “rational,” but they are always “human.” Thus, behavioral finance exposes the irrationality of investors in general and shows human fallibility in competitive markets.’ To many, the idea of market effi...
...the business tactics. Idea of growth and competitor business strategy is part of their explanation. Here are some who described economics and behavioral finance in all different perspective: Among major terminologies of economics, the classical economists have given much importance to the term “Competition”. Competition is something that surrounds the basic business environment, in which there are competitors, consumers and the market. Entrepreneurs call it a “business constraint”, as it changes for the success or failure of a business at the same time. The economists have provided several teachings in understanding the term “competition”. This is for the business strategists and those who seek technical strength for...
...?Topic: BehaviouralFinance Many studies in the area of behaviouralfinance suggest that individual investors make systematic errors due to behavioural biases. Do you believe that more sophisticated investors (e.g. equity fund managers) can capitalize on such individual investors’ errors and consistently outperform the market on a risk-adjusted basis? Why? Financial markets are very competitive and research studies note that there are little or no externalities from those participating in the market. Given such conditions, a rational investor has high chances of recording collectively efficient outcomes from investment decisions. It is very clear that...
...? BehaviouralFinance The world has for a long time been in need of a change in the way things are done, the people recognise that the social, political and economic conditions in the universe are not in line with the needs of the society. Technological advancements have been the constantly changing since 1900’s with people being able to communicate and transact on a global scale and the middle class rising faster than ever before. However, despite these advancements, the disparity gap between the wealthy and the financially deprived people has been rising, both in nation-to-nation comparison and within the countries (Leunig, 2011, 16). Adverse and extreme climatic conditions have increased in frequency and severity and adapting... than just...
...of Finance 40 (3), 793-805, 1985.
DeBondt and Thaler..Does Security Analysts Overeact? Journal of Finance 40 (3), 793-805. American Economic Review, 80 (2), 52-57, 1990.
Divecha,A. Are Developed Multinational Companies a Good Proxy for Emerging Markets? pp 4-15 2011.GMO LLC. Available from http://s3.amazonaws.com/files.posterous.com/sethkaufman/x9mGY7FPMxfVkDM6gEN1HjwBnTSQ26oS4FJS99kWxQWs4b7L5FORZKFpaSkx/QL-w9zS5xGW.pdf?AWSAccessKeyId=AKIAJFZAE65UYRT34AOQ&Expires=1330926409&Signature=6Tegv9%2FlONQ2TsSip0ou41tZOCY%3D
Health and Tversky. Preference and Belief: Ambiguity and Competence under Uncertainty. Journal of risk and Uncertainty 4: 5-28, 1991.
Lim. Do Investors Intergarte Losses...
...Task: Behavioral Finance Introduction The concept of behavioral finance is well handled by Mr. Montier who provides prolongedarguments in support of his suggestions that are mostly consistent with facts, figures and historical proofs. This clearly implies that Mr. Montier carried out a methodical research before he came up with these opinions. Since he provides facts, figures and historical prove of thorough research, this context seeks to support his opinions by providing a strong and convincing argument as to why it supports his opinions (Harper 19). Therefore, the ultimate aim of this context is to examine each of Mr. Montier’s articles and assess them one by one by providing supportive argument.
...and empirical assumptions about departures from perfect rationality under uncertainty. The solution for these disputes lies in extensive microeconomic empirical study of human decision making and problem solving. The required microeconomic research can be directed by theories of human thinking developed during last 25 years (Simon, 1984).
Movement of economic systems has concentrated on business cycle and long-term changes in technology and productivity. Simon discusses some conventional ideas about the functioning of economy, putting these ideas to empirical test and uses them for social policy formulation (Simon, 1984).
Foundations of Classical and Neoclassical Theory
Classical and neoclassical economic...
...Behavioral Finance- Microeconomics Theories Behavioral Finance- Microeconomics Theories Absence of a body of positive micro economic theory relating to risk condition has beset those attempting to predict the behaviour of capital markets. Traditional models have given insights of investment considering certain conditions of certainty though many prefer the method of price behaviour.
Economics is a science due to the complications in the subject matter and complications, in the mechanism of prices and production.
There has been an analysis of the behaviour of individuals constituting the economic community to illustrate the development of...
At this point, the author proposes that Wiener Brownian motion as the model which preserve scaling and stationarity as the basic principle of economics.
6. Proportional Growth As Well As Other Explanations Of Scaling
Given fractals in finance, the model of Tail-Driven variability outline that changes of successive price are usually independent and non-Gaussian but scaling and stationary.
This assists to explain proportional growth which is attributed by the economy development. It is worth noting that, economic development enhance better living, creates job opportunities, and better chances for investment.
This book is useful as it lays a strong foundation for learners to comprehend...
...Behaviouralfinance Table of Contents 3 Introduction 4 Inclusion criteria 4 Exclusion criteria 5 Literature Review 5 Different views of the researchers 6
Reference List 12
The literature emphasises on the need for a new economic paradigm. Economic paradigm is required for facilitating development of the global economy. This need is realised by every country around the world, but the government and higher authorities are reluctant to fulfil the same as it entails a huge investment. Hence, it is not plausible for the poor countries to incorporate and encourage the change. The environmental changes are frequent and unavoidable, but economic model change is rare and...
12 Pages(3000 words)Literature review
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Development of Behavioural Finance"
with a personal 20% discount.