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Behavioural finance - Research Paper Example

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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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Download file to see previous pages 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 ...Download file to see next pagesRead More
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