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Implications for Personal Investment - Coursework Example

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The paper "Implications for Personal Investment" highlights that loss aversion bias has grave implications on the decision making the process of individual investors. These biases are the greatest impediment in the financial decision making of investors…
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Implications for Personal Investment
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Download file to see previous pages The assumption of perfect rationality can be rebutted by the fact that rationality is not the sole driver of human behaviour. On the contrary, our behaviour is contingent upon emotions such as love, fear, pain, and pleasure etc. Human beings only use their intellectual power to achieve or avoid these emotional outcomes (Pompian 2006). Secondly, the assumption of self-interested is also not deemed to be practical because many sociological studies have shown that people are not always self-interested. Had this been the case, then there would not have been a single philanthropist in the world, even people would have avoided negative behaviour such as suicide and alcoholism. The final assumption of perfect information also does not hold true as people only possess perfect or near-perfect information in their domain of expertise. An engineer is only proficient in his discipline and he may not even know about the basics of medical science. The financial world, on the other hand, is filled up with several disciplines such as politics, psychology, finance, management, foreign exchange etc. So it is impossible that each and every investor would possess complete information in each of the disciplines hence it proves that information is not always perfect in the financial domain.
These fundamental flaws in the structure of standard finance made the academicians and researchers think over and refine the concepts behind the behaviour of individual investors. They were absolutely sure that awareness of psychological processes and biases is climacteric for finding success in the investment realm and such biases warranted thorough study. The standard finance was built on the principles that how investors should behave in the real environment whereas the new discipline of behavioural finance was organized around rules and principles that show how actually investors behave in the financial world. ...Download file to see next pagesRead More
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