Premium Essay

Behavioural Finance

In: Business and Management

Submitted By gaz1234567890
Words 899
Pages 4
1.- Problem statement and motivation
How do Financial Markets participants make decisions? How do these decisions affect the financial markets? With the financial markets in Asia being the largest in the world, such an interesting environment with participants displaying different levels of capitalism, financial market experience and knowledge, Asia is definitely a fertile ground for the study od behavioral finance.
According to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways. Asians in general suffer from cognitive biases, more so than Westerners, often being viewed as ‘Gamblers.
Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions .It calls for investigation into higher mental processes, memory, perception, problem solving and thinking .This paper looks at some of the anomalies (i.e., irregularities) that conventional financial theories have failed to explain. In addition, review underlying reasons and biases that cause some people to behave irrationally.
2.- Brief survey of the literature
The following areas of research have been covered, from the mid 1980’s to the main focus of the article(special edition 2008):
Overreaction and Availability Bias, Overconfidence, Cultural difference, Superstition, education and life experience, “house money effect” managerial optimism, collective orientated vs individual dynamic, or Gambler's Fallacy, Trading venue affect, life experience and education, media influence, Herd Behavior, Gender influence and availability heuristic. While...

Similar Documents

Premium Essay

Theories Of Behavioural Finance

...several definitions of behavioural finance exist, there is considerable agreement between them. According to Lintner, “Behavioural finance is the study of how humans interpret and act on information to make informed investment decisions.” Olsen opines that ‘behavioural finance does not try to define ‘rational’ behaviour or label decision making as biased or faulty; it seeks to understand and predict systematic financial market implications of psychological decision processes.’ It should be noted that no unified theory of behavioural finance exists at this time. Behavioural finance is based on research of human and social recognition and emotional tolerance studies to identify and understand incoming economic decisions. Behaviour finance examines recognition and emotional factors influence on the market changes and concentrates on the limited human rationality, explains the psychology effect on the financial activities and argues that financial phenomena can be better explained due to the fact that financial market participants are not rational and their decisions are...

Words: 766 - Pages: 4

Free Essay

Finance Behavioural

...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...

Words: 4442 - Pages: 18

Free Essay

Behavioural Finance

...A Behavioural Finance view of the Deepwater Horizon Disaster of 2010 INTRODUCTION The Deepwater Horizon disaster of 2010 was the largest accidental marine oil spill the oil industry has ever seen. It claimed 11 lives and caused huge environmental damage on the shoreline of the Gulf of Mexico by discharging circa 4.9 million barrels of oil. There have been numerous enquiries and studies into the accident to try to understand what happened, the goal of the enquiries was to establish where the fault and therefore guilt lay in order to ascertain compensation. This report attempts to apply key concepts from behavioural finance with a view to understanding the thought processes behind the decisions that were made. In the last decades there have been a lot of studies documenting the impact of psychological traits on the decisions made by managers. This report while touching on them, will not go into detail regarding the various technical difficulties encountered on the Deepwater Horizon and will instead focus on understanding the thought process of the various players involved. We will also briefly cover BP’s historical safety record as this will help us understand some of the behavioural factors in play within the organization. While BP was the principal on the Deepwater Horizon rig there were also other parties like Transocean , the rig operator, Halliburton, who operated in a consultancy position, Anadarko and Schlumberger. These companies played a part in the crisis and their...

Words: 3129 - Pages: 13

Premium Essay

Behavioural Finance Overview

...Behavioural Finance Topic 10 What it is: * Relatively new and controversial area in the study of finance. * Orthodox finance theory is based on a representative agent that is a rational utility ‘maximiser’ who makes unbiased forecasts about the future. * BF expands the attributes allowed for this representative, replacing the ‘rational’ agent with a ‘normal’ person who is susceptible to a range of cognitive illusions. How and why it began: * The idea that psychological factors may play a role in financial markets, as opposed to mant theorist have always known that less than rational behaviour has been a dominating feature of markets. * This counter act the rational utility maximising representative agent. Dividends: the dividend policy could be completely irrelevant to its share price. This can be shown with an example that if firm A was to pay a large dividene then its retained earnings fall. However if B paid a larger amount then the retainbed earnings is correspondingly higher. Which ever way you go the if the capitalisation is the same than the market will force the price up on the larger dividend company. Trading Volumes: Orthodox models of financial markets imply that there should be little trading in financial assets. The reason for this is that in a world that is rational why would anyone be selling an asset unless they had some information to suggest that they should – and if so, why would anyone else want to buy? Of course, some trading......

Words: 2792 - Pages: 12

Premium Essay

Popular Ipos and Behavioural Finance

...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......

Words: 877 - Pages: 4

Premium Essay

Behavioural Finance and the Psychology of Investing

...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......

Words: 17663 - Pages: 71

Free Essay

Behavioural Finance Book Review

...PREPARED BY :  ASHISH SHARMA 2014 2014 Behavioral Finance and Wealth Management Author Information “Michael M. Pompian, CFA, CFP, is a partner at Mercer Investment Consulting, a firm serving institutional and private wealth clients. Prior to joining Mercer, he was a wealth management advisor with Merrill Lynch and PNC Private Bank, and served on the investment staff of a family office. Pompian is a Chartered Financial Analyst (CFA), a Certified Financial Planner (CFP), and a Certified Trust Financial Advisor (CTFA). He is also a member of the CFA Institute (formerly AIMR) and the New York Society of Security Analysts (NYSSA). He holds a BS in management from the University of New Hampshire and an MBA in finance from Tulane University. Pompian is a regular speaker on the subject of behavioral finance and has published several articles on the subject. He is married with three sons and can be reached at michael.pompian@mercer.com. “ Michael M. Pompian describes various biases which we can see in human beings , also tells about various experiments on human beings in his book “ BEHAVIOURAL FINANCE AND WEALTH MANAGEMENT “ and tells “HOW TO BUILD OPTIMAL PORTFOLIOS THAT ACCOUNTS FOR INVESTOR BIASES “ The book is published by John wiley and sons, inc. ,Hoboken , New jersey. Published simultaneously in Canada. The book was published in the year 2006 . SUMMARY : Understanding the use of behavioral finance theory in investing is a important topic these......

Words: 4842 - Pages: 20

Premium Essay

Επενδυτικά Σφάλματα & Behavioural Finance

...Σύμφωνα με μια παλιά παροιμία της Wall Street, οι αγορές επηρεάζονται από δύο παράγοντες: τον φόβο και την απληστία. Αν και σε μεγάλο βαθμό αυτό είναι αληθές, η συγκεκριμένη κατηγοριοποίηση είναι ιδιαίτερα υπεραπλουστευμένη, αφού δεν πρέπει να ξεχνάμε ότι οι αγορές αποτελούνται από άτομα και το ανθρώπινο μυαλό είναι ιδιαίτερα πολυσύνθετο. Επιπλέον τα συναισθήματα είναι τόσο πολύπλοκα που ο φόβος και η απληστία αδυνατούν να περιγράψουν με ακρίβεια το σύνολο των ψυχολογικών παραγόντων που επηρεάζουν τα άτομα κατά τη διαδικασία λήψης επενδυτικών αποφάσεων. Όπως είναι γνωστό, η παραδοσιακή χρηματοοικονομική επιστήμη έχει επικεντρωθεί στην ανάπτυξη εργαλείων που χρησιμοποιούν οι επενδυτές για να μεγιστοποιήσουν την αναμενόμενη απόδοση και να ελαχιστοποιήσουν τον κίνδυνο που αναλαμβάνουν. Η προσπάθεια αυτή αποδείχθηκε πολύ αποτελεσματική και αναδείχθηκαν χρήσιμα επενδυτικά εργαλεία όπως είναι τα υποδείγματα αποτίμησης αξιογράφων, η θεωρία χαρτοφυλακίου, το υπόδειγμα εξισορροπητικής κερδοσκοπίας κ.λπ. Αν και οι επενδυτές θα έπρεπε να χρησιμοποιούν αυτά τα εργαλεία κατά τη διαδικασία λήψης των επενδυτικών τους αποφάσεων, συνήθως δεν το πράττουν, καθώς φαίνεται ότι η ψυχολογία επηρεάζει τις επενδυτικές αποφάσεις σε μεγαλύτερο βαθμό από την χρηματοοικονομική θεωρία. Σαν αποτέλεσμα, μια σειρά από συμπεριφορικά σφάλματα δυσχεραίνουν την επενδυτική διαδικασία, καθώς οι επενδυτές αλλά και οι διαχειριστές χαρτοφυλακίων (fund managers) διαπράττουν αποδεδειγμένα μια σειρά από......

Words: 256 - Pages: 2

Premium Essay

I/O Psychology Paper

...Industrial Organizational Psychology Paper Edward Oliver, Jr. 435/ Industrial Organizational Psychology May 23, 2012 Dr. Keisha Pou Industrial Organizational Psychology Paper In the 21st century various companies in the United States and internationally have used Industrial Organizational Psychology (I/O) in the workplace. For example, AT&T use extrinsic rewards programs to motivate their sales representative to increase sell volumes at each mobility center. Kaiser Permanente also has extrinsic rewards if the departments in the faculties have a high score in customer service they receive an expenses paid vacation to an exotic island in the Bahamas or Caribbean. In this paper the author will identify the evolution of Industrial/Organizational psychology, the difference of Industrial/Organizational psychology and other disciples of psychology, the use of Industrial/Organizational psychology in companies, and the role of Industrial/Organizational psychology in research and statistics. The evolution of Industrial/Organizational Psychology According to Spector (2008), the evolution of I/O psychology begins in the twentieth century, which started in the late 1800s. The two psychologists responsible for I/O psychology is Hugo Munsterberg and Walter Dill Scott both of......

Words: 795 - Pages: 4

Free Essay

Psy 428 Complete Class

...PSY 428 COMPLETE CLASS To Purchase this tutorial visit following link http://wiseamerican.us/product/psy-428-complete-class/ Contact us at: SUPPORT@WISEAMERICAN.US PSY 428 COMPLETE CLASS PSY-428 WEEK 2 DQ 1.doc PSY-428 ORGANIZATIONAL PSYCHOLOGY PAPER.doc PSY-428 PRODUCTIVE AND COUNTER PRODUCTIVE BEHAVIOR.doc PSY-428 WEEK 1 DQ 1.doc PSY-428 WEEK 1 DQ 2.doc PSY-428 WEEK 2 DQ 2.doc PSY-428 WEEK 3 INDIVIDUAL ASSIGNMENT.doc PSY-428 WEEK 3 TEAM ASSIGNMENT.doc PSY-428 WEEK 4 DQ 1.doc PSY-428 WEEK 4 DQ 2.doc PSY-428 WEEK 5 ASSIGNMENT.doc PSY-428 WEEK 5 DQ 1.doc PSY-428 WEEK 5 DQ 2.doc PSY-428-Week-5-Learning-Team-Assignment-Environmental-Proposal-and-Presentation-PLEASE-ADD-OWN-IMAGES.pptx PSY 428 COMPLETE CLASS PSY-428 WEEK 2 DQ 1.doc PSY-428 ORGANIZATIONAL PSYCHOLOGY PAPER.doc PSY-428 PRODUCTIVE AND COUNTER PRODUCTIVE BEHAVIOR.doc PSY-428 WEEK 1 DQ 1.doc PSY-428 WEEK 1 DQ 2.doc PSY-428 WEEK 2 DQ 2.doc PSY-428 WEEK 3 INDIVIDUAL ASSIGNMENT.doc PSY-428 WEEK 3 TEAM ASSIGNMENT.doc PSY-428 WEEK 4 DQ 1.doc PSY-428 WEEK 4 DQ 2.doc PSY-428 WEEK 5 ASSIGNMENT.doc PSY-428 WEEK 5 DQ 1.doc PSY-428 WEEK 5 DQ 2.doc PSY-428-Week-5-Learning-Team-Assignment-Environmental-Proposal-and-Presentation-PLEASE-ADD-OWN-IMAGES.pptx PSY 428 COMPLETE CLASS PSY-428 WEEK 2 DQ 1.doc PSY-428 ORGANIZATIONAL PSYCHOLOGY PAPER.doc PSY-428 PRODUCTIVE AND COUNTER PRODUCTIVE BEHAVIOR.doc PSY-428 WEEK 1 DQ 1.doc PSY-428 WEEK 1 DQ 2.doc PSY-428 WEEK 2 DQ 2.doc PSY-428 WEEK 3......

Words: 355 - Pages: 2

Premium Essay

Nature Nurture

...The historical debate regarding nature and nurture has been going on for years and is still unresolved. Many theorists believe what we have inherited and our genes, makes us the way we are and how we develop. Other theorists believe it is the way we are brought up and our experiences, that make us the way we are and how we develop. Physical The way we look can be argued to be mainly due to nature. The genes we inherit from our parents make the basis of we look. For example, people often say ‘Don’t you look like your father/mother?’ Genetic inheritance can determine our eye colour, whether we have straight or curly hair or how tall we will be. We can also inherit certain disease which can seriously impact on our health. However, we can make decisions on how we look and change our appearance. There are many different cosmetic procedures available to alter our appearance. How we live our life and the choices we make can also have an impact on how we look. For example, eating junk food and not exercising can lead to obesity. The environment we are brought up in and the experiences we have, can influence our health which contributes to physical development. An example of how nature and nurture affect our physical development is; we may carry genes that increase our risk of developing type 2 diabetes, but if we eat a healthy diet and get sufficient exercise, we may not develop the disease. The genes for characteristics we inherit are called genotypes. The actual express of these...

Words: 1285 - Pages: 6

Free Essay

History of Od

...science knowledge at various levels (group, intergroup, and total organization) to bring about planned change (Newstrom & Davis, 1993) Organizational development As defined by Richard Beckhard, "Organizational development" (OD) is a planned, top-down, organization-wide effort to increase the organization's effectiveness and health. OD is achieved through interventions in the organization's "processes," using behavioural science knowledge. According to Warren Bennis, OD is a complex strategy intended to change the beliefs, attitudes, values, and structure of organizations so that they can better adapt to new technologies, markets, and challenges. Warner Burke emphasizes that OD is not just "anything done to better an organization"; it is a particular kind of change process designed to bring about a particular kind of end result. OD involves organizational reflection, system improvement, planning, and self-analysis. Change Agent A change agent in the sense used here is not a technical expert skilled in such functional areas as accounting, production, or finance. He is a behavioral scientist who knows how to get people in an organization involved in solving their own problems. His main strength is a comprehensive knowledge of human behavior, supported by a number of intervention techniques (to be discussed later). The change agent can be either external or internal to the organization. An internal change agent is usually a staff person who has...

Words: 3449 - Pages: 14

Premium Essay

Organizational Behavior

...Organizational Behavior W. Jack Duncan Book review Meera Iyer Chapters 1. Organizational behavior: defining the field 2. Historical perspective 3. Methodological foundations of organizational behavior 4. Personality development and attitudes 5. The cognitive basis of individual behavior 6. Motivation: Theory and selected research 7. Introduction to small group behavior 8. Leadership behavior and effectiveness 9. Intergroup analysis: Co-ordination and conflict 10. The organization and the individual 11. Environments, organizations and behavior 12. Power relations in organizations 13. Performance evaluation and organizational effectiveness 14. Planned change and organizational development This book is about organizational behavior. It is also a text on management. The objective of the book is to present a research based approach to management from an applied behavioral science perspective. I have summarized each chapter of the book, explaining the main points that the authors wish to communicate. © www.hrfolks.com All Rights Reserved Organizational behavior – Defining the field Organizations are collections of interacting and inter related human and non-human resources working toward a common goal or set of goals within the framework of structured relationships. Organizational behavior is concerned with all aspects of how organizations influence the behavior of individuals and how......

Words: 4349 - Pages: 18

Premium Essay

Competencies of an Od Facilitator

...ORGANIZATION DEVELOPMENT (IB H406) Masters Program in International Business Badruka Institute of Foreign Trade, Hyderabad COMPETENCIES OF AN O/D FACILITATOR ‐‐‐‐‐ ‐‐‐‐‐ ‐‐‐‐ ‐‐‐‐‐ FOLLOWING ARE THE ESSENTIAL COMPETENCIES FOR AN O/D FACILITATOR (WORLEY):  SELF‐MASTERY.   BEING COMFORTABLE WITH AMBIGUITY.  MANAGING TRANSITIONS AND INSTITUTIONALIZATION. PARTICIPATIVE, CREATE GOOD IMPLEMENTATION PLAN.  PARTICIPATIVE, CREATE GOOD IMPLEMENTATION PLAN.  MANAGING SEPARATION.  MANAGING CLIENT OWNERSHIP OF CHANGE.  SETTING CONDITIONS OF POSITIVE CHANGE.  USING DATA TO ADJUST CHANGE.  ABILITY TO WORK WITH LARGE SYSTEMS.  STAYING CURRENT WITH TECHNOLOGY. ABILITY TO EVALUATE CHANGE.  ABILITY TO EVALUATE CHANGE  ABILITY TO CLARIFY DATA NEEDS.  UNDERSTAND RESEARCH METHODS.  BEING AVAILABLE TO LISTEN TO MULTIPLE STAKEHOLDERS.  BUILDING REALISTIC RELATIONSHIPS.   ABILITY TO WORK WITH AND MANAGE DIVERSITY.  ABILITY TO CLARIFY ROLES. COMPETENCIES OF AN O/D FACILITATOR ‐‐‐‐‐ ‐‐‐‐‐ ‐‐‐‐ ‐‐‐‐‐ FOLLOWING ARE THE ESSENTIAL COMPETENCIES FOR AN O/D FACILITATOR – CONTD…  ABILITY TO WORK WITH POWER.  ABILITY TO KEEP AN OPEN MIND.  ABILITY TO SEE WHOLE PICTURE.  ABILITY TO INTEGRATE THEORY AND PRACTICE.  ABILITY TO FOCUS ON RELEVANCE AND FLEXIBILITY.  CLARIFYING OUTCOMES. IMPLIED IN THE ABOVE LIST ARE:  SELF AWARENESS.  CONSULTING PROCESS MANAGEMENT COMPETENCIES.  ABILITY TO DIAGNOSE AND UNDERSTAND THE SYSTEM, DESIGN AND EXECUTE ......

Words: 488 - Pages: 2

Free Essay

Organisational Development

...ASSIGNMENT:1 QUESTION :What are the main foundations of Organization Development? What are the stages of OD as suggested by Kurt Lewin and subsequently modified by Lippitt, Watson &Westley? ANSWER: 1) FOUNDATION OF OD (a) The field of OD rests on a foundation of values and assumptions about people and organizations. These beliefs help to define what OD is and guide its implementation. (b) Values have always been an integral part of OD package. OD values and assumption developed from research and theory, by behavioral scientist and from the experiences and observations of practicing managers. OD values tend to be humanistic, optimistic and democratic. (d) The knowledge base of OD is extensive and is constantly being upgraded. The most important concept on which OD is constructed is as follows: i) Model & theories of planned change : Organization development is directed at bringing about planned change to increase an organization's effectiveness, generally initiated and implemented by managers, often with the help of an OD practitioner either from inside or outside of the organization. Organizations can use planned change to solve problems, to learn from experience, to reframe shared perceptions, to adapt to external environmental changes, to improve performance, and to influence future changes. The theories describe the different stages through which planned change may be effected in organizations and explain the process of applying OD methods......

Words: 1147 - Pages: 5