...Popular IPOs and Behavioural Finance 1 a) The IPO of Facebook Executive Summary This report examines and evaluates any observable behavioural finance phenomena during the recent Facebook Initial Public Offering. It starts by looking into Facebook’s background and what led up to the decision of turning the company public. It gives a brief explanation on the reasoning behind the decision and outlines the company’s main aims and focuses. It then gets into a few behavioural finance theories which help to explain the reasoning and decision-making process of investors purchasing Facebook stocks. Due to the very high anticipation of Facebook’s IPO and the company’s overall popularity, many investors may be over-confident or overestimate Facebook’s stock performance in the future. This may be damaging towards investors. However it is then concluded, that even though many investors decisions to purchase Facebook stocks may not be completely rational, they may still turn out to be beneficial for the investor. Introduction An IPO or Initial Public Offering, which can also be called Stock Market Launch, can be defined as a private company’s first sale of stock to the public. It is through this process that a private company is transformed into a public company. One of the most common reasons for going public is to raise expansion capital, which is to be used for the company’s growth. Behavioural Finance can be defined as a field of finance, which seeks to provide explanations as...
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...Behavioural Finance Martin Sewell University of Cambridge February 2007 (revised April 2010) Abstract An introduction to behavioural finance, including a review of the major works and a summary of important heuristics. 1 Introduction Behavioural finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets. Behavioural finance is of interest because it helps explain why and how markets might be inefficient. For more information on behavioural finance, see Sewell (2001). 2 History Back in 1896, Gustave le Bon wrote The Crowd: A Study of the Popular Mind, one of the greatest and most influential books of social psychology ever written (le Bon 1896). Selden (1912) wrote Psychology of the Stock Market. He based the book ‘upon the belief that the movements of prices on the exchanges are dependent to a very considerable degree on the mental attitude of the investing and trading public’. In 1956 the US psychologist Leon Festinger introduced a new concept in social psychology: the theory of cognitive dissonance (Festinger, Riecken and Schachter 1956). When two simultaneously held cognitions are inconsistent, this will produce a state of cognitive dissonance. Because the experience of dissonance is unpleasant, the person will strive to reduce it by changing their beliefs. Pratt (1964) considers utility functions, risk aversion and also risks considered as a proportion of total assets...
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...The Development of Modern Finance "A Short History of Value" David Roubaud & Jean-Charles Bagneris 10/2011 The Main Steps of the Theory Building • Portfolio Selection (Markowitz, 1952) • CAPM (Sharpe, 1963) • Financing and Dividend Decisions Neutrality (Modigliani et Miller, 1958, 1961,1963) • Efficient Markets (Fama, 1965, 1970) • Options Pricing Theory (Black & Scholes, 1973, Myers, 1977) • Agency Theory (Jensen, Meckling, 1976) • Efficient Markets II (Fama, 1991) • Behavioural Finance (Kahneman & Tversky, 1979, Shiller, 1981, 2000) Portfolio Selection • Investors are rationals and risk averse • Diversification lowers specific risk • Any portfolio is a combination of the market portfolio and the riskless asset The CAPM Capital Asset Pricing Model • Systematic risk of an asset is measured by its beta coefficient • The model calibrates the risk-return relationship • Simple, elegant and linear model => big success • Low explaining power (strong assumptions) • Alternative models are difficult to use 1 The Development of Modern Finance 2 Financial Markets Efficiency "At any given point in time, assets prices on financial markets account for all available information." • Strong assumptions on: – markets organization – investors behaviour • One consequence of EMH is Random Walk Hypothesis • Assumptions are not always true: 3 forms of efficiency (strong, semi-strong, weak) The irrelevance of financing and dividends decisions In a world without taxes and with perfect financial markets...
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...1111/j.1468-036X.2007.00415.x Behavioural Finance: A Review and Synthesis Avanidhar Subrahmanyam Anderson Graduate School of Management, University of California at Los Angeles, USA E-mail: subra@anderson.ucla.edu Abstract I provide a synthesis of the Behavioural finance literature over the past two decades. I review the literature in three parts, namely, (i) empirical and theoretical analyses of patterns in the cross-section of average stock returns, (ii) studies on trading activity, and (iii) research in corporate finance. Behavioural finance is an exciting new field because it presents a number of normative implications for both individual investors and CEOs. The papers reviewed here allow us to learn more about these specific implications. Keywords: behavioural finance, market efficiency, cross-section of stock returns JEL classifications: G00, G10, G11, G14, G31, G32, G34 1. Introduction The field of finance, until recently, had the following central paradigms: (i) portfolio allocation based on expected return and risk (ii) risk-based asset pricing models such as the CAPM and other similar frameworks, (iii) the pricing of contingent claims, and (iv) the Miller-Modigliani theorem and its augmentation by the theory of agency. These economic ideas were all derived from investor rationality. While these approaches revolutionised the study of finance and brought rigour into the field, many lacunae were left outstanding by the theories. For example, the traditional...
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...Behavioural Finance Martin Sewell University of Cambridge February 2007 (revised April 2010) Abstract An introduction to behavioural finance, including a review of the major works and a summary of important heuristics. 1 Introduction Behavioural finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets. Behavioural finance is of interest because it helps explain why and how markets might be inefficient. For more information on behavioural finance, see Sewell (2001). 2 History Back in 1896, Gustave le Bon wrote The Crowd: A Study of the Popular Mind, one of the greatest and most influential books of social psychology ever written (le Bon 1896). Selden (1912) wrote Psychology of the Stock Market. He based the book ‘upon the belief that the movements of prices on the exchanges are dependent to a very considerable degree on the mental attitude of the investing and trading public’. In 1956 the US psychologist Leon Festinger introduced a new concept in social psychology: the theory of cognitive dissonance (Festinger, Riecken and Schachter 1956). When two simultaneously held cognitions are inconsistent, this will produce a state of cognitive dissonance. Because the experience of dissonance is unpleasant, the person will strive to reduce it by changing their beliefs. Pratt (1964) considers utility functions, risk aversion and also risks considered as a proportion of total assets. Tversky and Kahneman...
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...Introduction Efficient market hypothesis is widely accepted by academic community as a cornerstone of modern financial theory. Fama (1970) gives detailed definition of this theory and states that efficient market is a market that stock prices quickly and fully reflect all available and newly released information, where majority of participants are rational in their decision making process and where an investor is not able to outperform the market through any analyses, because of actual price of stock shows its intrinsic value. Naturally such revolutionary hypothesis did not occur suddenly. In 1990 Louis Bachelier in his "Theory of Speculation" paragraph gave definition of informational efficiency of the market. This study was not being developed until 1953 when Maurice Kendall who postulated that stock prices movement follow the random walk theory. Further enhancement of these studies associated with the name of Eugene Fama who gave comprehensive resume of efficient market hypothesis, as well as empirical evidences to support it and defined three form of efficient market: weak, semi-strong and strong in 1970 (Dimson and Mussavian, 1998). Later several different researches have been carried out by financial academics which continuously underpinned efficient market hypothesis. Consequently this theory began widely use by investors for investment decision making process. However only after two decades this hypothesis began less dominance in the market. Several crashes, changing...
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...Behavioural Finance Security Analysis and Portfolio Management Behavioural Finance This is referred as a field of study that combines behavioural and cognitive psychological theory with conventional economics and finance to explain why people tend to behave in unpredictable and irrational manner. It tries to explain how investors often tend to differ from the traditional and rational economic assumptions because misrepresentation, over-confidence, biases aversion to ambiguity etc. Prospect Theory This theory states that investors pay attention to change in each transaction than the total value and have a tendency to get more distressed by the prospective losses than the happiness from prospective gains in an investment. 1. Frame Dependence: Example: 2. Mental Accounting: It explains how current and future assets are divided into different groups and therefore differently treated which explains the change in their investment decision and behaviour. Example: If given an option to buy either a piece of land at Rs.1000000 and save Rs.50000 on the deal or a car at Rs.500000 and save Rs.50000, most people will buy the car. Even though the savings is the same in both the cases, the amount saved on car is a more powerful motivator than the savings on the piece of land. 3. House money effect: This effect was given by Thaler and Johnson. Example: A set of twenty investors are given Rs.25000 and given a chance to toss where they either win Rs.10000 or lose...
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...CHAPTER 9 Behavioural Finance and the Psychology of Investing “The investor’s chief problem, and even his worst enemy, is likely to be himself.” —Benjamin Graham “There are three factors that influence the market: Fear, Greed, and Greed.” —Market folklore Be honest: Do you think of yourself as a better than average driver? If you do, you are not alone. About 80 percent of the people who are asked this question will say yes. Evidently, we tend to overestimate our abilities behind the wheel. Is the same thing true when it comes to making investment decisions? You will probably not be surprised when we say that human beings sometimes make errors in judgment. How these errors, and other aspects of human behaviour, affect investors and asset prices falls under the general heading of “behavioural finance.” In the first part of this chapter, our goal is to acquaint you with some common types of mistakes investors make and their financial implications. As you will see, researchers have identified a wide variety of potentially damaging behaviours. In the second part of the chapter, we describe a trading strategy known as “technical analysis.” Some investors use technical analysis as a tool to try to exploit patterns in prices. These patterns are thought to exist (by advocates of technical analysis) because of predictable behaviour by investors. Chapter 9 Behavioural Finance and the Psychology of Investing 273 9.1 Introduction to Behavioural Finance Sooner or...
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...ABSTRACT Behavioural finance is part of finance that seeks to understand and explain the systematic financial market implications of psychological decision processes. It utilizes knowledge of cognitive psychology, social sciences and anthropology to explain irrational investor behavior that is not being captured by the traditional rational based models. INTRODUCTION Classical investment theories are based on the assumption that investors always act in a manner that maximizes their return. Yet a number of research show that investors are not always so rational. Human become puzzled when the uncertainty regarding investment decision engulfs them. People are not always rational and markets are not always efficient. Behavioral finance explains why individual do not always make the decisions they are expected to make and why markets do not reliably behave as they are expected to behave. Recent research shows that the average investors make decisions based on emotion, not logic; most investor’s buy high on speculations and sale low on panic mood. Psychological studies reveal that the pain of losing money from investment is really three times greater than the joy of earning money. Emotions such as fear and greed often play a pivotal role in investor’s decision; there are also other causes of irrational behavior. It is observed that stock price moves up and down on a daily basis without any change in fundamental of economies. It is also observed that people in the stock market...
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...Behavioural Finance Literature Review Name Institution Professor Date ABSTRACT INTRODUCTION It is tough today to avoid the concept of behavioural finance in the day to day operations of the modern day’s business. All over the world Governments are in a process of experimenting the application of the psychology of decision making to tune their citizens towards better behaviours. Companies and institutions are paying attention to this concept as a new opportunity of realizing profits. Traditionally, the finance paradigms relied heavily on understanding finance markets using the models that had agents who were rational. In the Scenario, rationality implied that when the companies received new information, they updated their agents believes as described by the Bayes law. Besides, with their beliefs, managers and agents made decisions that are acceptable because they are consistent with the Savage idea of Subjective Expected Utility. This traditional approach was viewed as successful if it received data backing. However, as markets became complicated, it became clear that basic acts involving the stock market, the average returns and peoples trading behaviours could not be comprehended in the traditional model. The behavioural finance is the new approach to the emerging financial markets as it addressed the challenges faced by the traditional paradigms. The basic argument of this paradigm is that some financial phenomena can be best can be best comprehended by the...
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...Samuelson and Eugene F. Fama in the 1960s, this idea has been applied extensively to theoretical models and empirical studies of financial securities prices, generating considerable controversy as well as fundamental insights into the price-discovery process. The most enduring critique comes from psychologists and behavioural economists who argue that the EMH is based on counterfactual assumptions regarding human behaviour, that is, rationality. Recent advances in evolutionary psychology and the cognitive neurosciences may be able to reconcile the EMH with behavioural anomalies. There is an old joke, widely told among economists, about an economist strolling down the street with a companion. They come upon a $100 bill lying on the ground, and as the companion reaches down to pick it up, the economist says, ‘Don’t bother – if it were a genuine $100 bill, someone would have already picked it up’. This humorous example of economic logic gone awry is a fairly accurate rendition of the efficient markets hypothesis (EMH), one of the most hotly contested propositions in all the social sciences. It is disarmingly simple to state, has far-reaching consequences for academic theories and business practice, and yet is surprisingly resilient to empirical proof or refutation. Even after several decades of research and literally thousands of published studies, economists have not yet reached a consensus about whether markets – particularly financial markets – are, in fact, efficient. The origins...
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...Chapter 16: Market efficiency: Concept of market efficiency An efficient market has been defined as one in which the prices of securities fully reflect all available information. This requires that the reaction of the market prices to new information should be instantaneous and unbiased. If such conditions exist, it will not be possible (except by chance) to employ either past information or a mechanical trading strategy to generate returns in excess of the returns warranted by the level of risk involved. In short, consistent excess profits will not be made. Or in an efficient market it is not possible to consistently make an abnormal return. Statement 1 What would cause a market to be efficient? The main argument in support of efficiency is the existence of a competitive market in which numerous investors are competing in an effort to make abnormal returns. It is suggested that, in such a market, investors will seek information and take immediate action to buy or sell securities based on any new information. As a result, information will be impounded very quickly in market prices. Market efficiency may be improved by an increase in the quantity and quality of information that is made publicly available, and a reduction in restrictions on insider trading. Statement 1 * New information regarding securities comes to the market in random fashion. * Profit maximising investors cause security prices to adjust rapidly to reflect the effect of new information. ...
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...SHRI RAM COLLEGE OF COMMERCE A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR Project work Paper No. – CH 6.3 (b) (Submitted for Partial Fulfillment Towards Requirement of B.COM (HONS.) Course) Ashvi Mittal 12BC136 12072204129 E-21 2014-15 UNDER THE SUPERVISION OF Miss Ankita Tomar Assistant Professor Department of Commerce Shri Ram College of Commerce University of Delhi 1 DECLARATION BY STUDENT This is to certify that the material embodied in this study entitled “A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR” is based on my own research work and my indebtedness to other work/publications has been acknowledged at the relevant places. This study has not been submitted elsewhere either wholly or in part for award of any degree. Ashvi Mittal B.Com(H) Section-E 12BC136 2 DECLARATION BY TEACHER INCHARGE This is to certify that the project titled “A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR” done by Ashvi Mittal is a part of her academic curriculum for the degree of B.Com(H). It has no commercial implication and is done only for academic purpose. Mrs Aruna Jha Miss Ankita Tomar (Teacher in- charge’s name and signature) signature) 3 (Mentor’s name and Signature) ACKNOWLEDGEMENT I feel great pleasure in expressing my gratitude to my mentor Miss Ankita Tomar of Commerce Department, Shri Ram College of...
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...organisations. Studying the theories underlying Financial Management practices allows students to understand and explain the financial behaviours of corporations and other organisations. An understanding of the practices of Financial Management equips students with the knowledge and understanding necessary to apply this knowledge to real-life business situations. In an organisation financial management is split into its two principal roles. These are the accounting function, usually under the direction of the financial controller, and the corporate finance function directed by the treasurer. Accounting is concerned with the provision and interpretation of information for economic decision making. Accounting is itself split between management accounting - the internal facing function - which services the information needs of the organisation’s management and financial accounting - the external facing, highly regulated, function - which provides information for investors, the general public, regulatory bodies etc. The corporate finance function is concerned with managing the finances of the organisation and is involved in cash management, asset allocation, capital structuring and financial risk management in areas such as interest rates, foreign currency exchange rates and commodity trading. The programme is structured so that students specialise through courses within choices including advanced corporate finance, advanced finance theory, behavioural finance and market anomalies...
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...specialists and line managers in meeting their responsibilities for selecting, deploying, training, appraising, rewarding, relating to and retaining human resources. Learning Outcomes: On completing the module, students are expected to be able to: • Explain the contribution of the HR function to corporate strategy; • Discuss the processes of recruitment, assessment and selection; • Outline activities involved in developing human resources and facilitating learning; • Explain the link between rewards, motivation and performance; • Critically evaluate the changing employment relationship, assessing the role of trade unions and other forms of employee involvement. Module Content: • History of the HR function, theories and models of HRM; • The roles and responsibilities of stakeholders in HRM; • The changing nature of work, managing diversity, technology and flexibility; • Human resourcing: recruitment and selection, human resource planning; • Reward and performance management; • Employee relations, employment legislation, the legal framework for unionism; • Human resource development; managing learning, knowledge and change; • The integration of HR and corporate strategy. Teaching Format: One 2-hour lecture per week; Three 1-hour tutorials. Assessment: • Group coursework assignment (40%); • Individual written coursework assignment (60%). Text(s): Beardwell, J. and...
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