The current competitive business arena has forced many local and international companies to undertake extensive research with an aim of expanding their investment portfolio as well as face off their competitors. In their efforts to determine the occurrence of a certain event,…
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It is imperative to note that the mistakes made by portfolio managers, brokers and other market participants are driven by behavioral biases. This paper seeks to analyze major behavioral biases that cause the investment mistakes and the reasons as to the participants fall in the trap.
During the decision making process, investors should fame the questions that will guide them in the process. According to Tversky and Kahneman 1124, the framing of a problem highly influences the decisions made by the investors. Framing bias entails the failure to reframe the choices given. As a result, investors suffer losses that can be avoided if the questions are reframed by the participants during a research. In order to ensure appropriate choices are made Lim 2540 depicts that managers should consider various factors. First, they should ask themselves whether or not they are addressing the actual problem. Secondly, they should integrate gains and losses in the choices available. Thirdly, they need to reverse the questions. For example, if there are sellers they should evaluate their behaviors assuming they are buyers. Fourthly, managers must frame the questions to cover the entre aspects of an investment for instance the total costs. In addition, managers must emulate an intensive perspective during framing. The section below analyses some of the major statistical errors that are associated with framing bias.
Representativeness heuristic is adopted by people to evaluate the probability based on the fact that an event A resembles and event B. For example, if an event B is highly representative to an event A, then it means that the probability that A originated from B is high (Tversky and Kahneman 1124). One of the major courses of errors that are related to representativeness is the use of similarity to determine the relationship between events. This is based on
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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...
...?Development of BehaviouralFinanceBehaviouralfinance 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 behaviouralfinance is to track down why individuals operating in a market tend to make the choices they make. A range of differentiated factors as well as psychological issues are taken into account in order to explain people’s financial habits. The evolution of behaviouralfinance can be traced back to Gustave le Bon’s The Crowd: A Study of the Popular Mind (1896). This was followed by...
...?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... Behavioural...
...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.
...Topic The Foundations of the Revealed Preference Theory There is growing tendency of greater rigor in modern economic theory in Formulationof its assumptions
2) Standards of proof on which assumptions imply
The use of rigor is commendable because it:
1) Assures that conclusions are incurred by hypotheses
2) Spares us with unrealistic economic assumptions (perfect competition, divisibility, and restrictive mathematical conditions)
3) Leads to more precise theory and greater realism
However, its dedication to rigor can lead to indiscriminate application, formalism, and a level of abstraction that makes it difficult for economists. However, this unfamiliarity does not validate the objection to its implementation. Newman (1955... The Foundations ...
...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...
..., from this article, readers can comprehend the following.
The concept of behaviouralfinance that has a fundamental application in the field of economics.
Understand the Brownian model, which is widely used in finance and physics.
The book gives the background information of the model in that, it outlines how Louis Bachelier it in 1900 with an aim of understanding modeling fluctuations of prices in financial markets.
It makes readers to articulate Albert Einstein contribution in mathematical model, which was first established by Robert Brown in 1827.
Chaos and Order in the Capital Market by Edgar Peters
This is a book by Peter (1996), who in great thoughts outlines facts of...
...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 difficult to attain...
12 Pages(3000 words)Literature review
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