Behavioral Finance

Behavioral finance is a study which involves the influence of psychology on the attitudes and behavior of investors and its subsequent effects on the markets. Behavioral Studies is still in its development stages, but it is instrumental in determining/ explaining as to why or how markets might be inefficient. The difference between traditional finance and behavioral finance is that traditional finance is based on the following concepts: – Investors have rational behavior – Capital Asset Pricing Model (CAPM) – Markets are efficientBehavioral finance on the other hand says that, the psychological forces interfere with these concepts. It says that there are both internal and external behavioral obstacles towards the value creation of any company. In practical terms it brings forward the errors in judgments made by both individual investors and fund managers and the various biases to which we as humans are prone. Analyzing this will place us in a position to make dec isions which avoid errors/mistakes committed in the past . INVESTORS: Individual investors: An individual investor is a person who purchases small amounts of securities for him/herself.He is not professionally involved in investment services and whatever purchases he/she makes are on an arm’s length basis. Individual investors are highly regulated because they are thought of as amateurs with little or no knowledge. An individual investor is also known as retail investor or small investor . Professional investor: These investors are usually all those businesses which are involved in giving investment services either directly or indirectly for example, investment companies, mutual funds, investment banks, brokerage houses etc.Besides them professional investors could also be individuals which are professionally involved in giving investment services. Professional investors are also known as institutional investors. These investors are subject to fewer regulations probably becau se they are perceived as having superior knowledge to individual investors . Behavioral biases: Individual and Institutional investors are both prone to almost similar biases, because institutional investors are although organizations in their own right but in actual are lead by a handful of managers.Proponents of this study argue that humans are prone to bias in making their judgments no matter how qualified or experienced they may be. They say that humans make frequent use of heuristics, mental shortcuts/rules of thumb to simplify decisions and tasks that are complex. Availability heuristic: With availability heuristic it is believed that for humans the probability of an event occurring is dependent on how easily one can imagine that event happening. The more clear is the image the greater the probability.A related concept is Illusory correlation which describes we imagine and hence interpret evidence. Although this bias is limited for retail investors since not only their investm ents are smaller but they also don’t have various charts, patterns analyzing past year data at their disposal, as for institutional investors this bias is at a much more magnified level because many fund managers use charts and technical analysis which according to them helps in identifying various patterns and price/stock moments . Representativeness heuristic:This concept says that humans are prone making judgments that involve consideration of stereo-types instead of the underlying features. For example, while hiring the selection process takes into consideration the qualifications, relevant experience, personality etc. however this in no way can predict the future job performance of the individual. This also incorporates a related concept called Illusion of validity which puts forward that the confidence in one’s judgment is primarily based on the representation of the situation instead of the characteristics.However, retail investors are more prone to this bias as compared to institutional investors because they have the information that is available to the general public for example, commentaries from financial journalists, analysts which believe that well known companies are good stock-market investment options, but in reality these two factors are largely unrelated . Anchoring and adjustment: This is another important heuristic according to which decisions made by humans are dependent on some key value/number.There is no process or logic behind determination of this value/number it could be any random number. For example, budgeting which involves use of current figures to determine future estimates. Many fund managers use current year figures and current year industry averages to determine future estimates. This bias is a product of our inherent conservatism which leads to our under reaction to new information. Institutional investors are more prone to this bias as compared to small investors. Probably because the managers of investment c ompanies actively use these techniques to draw conclusions.Small investors would hardly be aware so these techniques however those with an accounting background could be an exception . Loss aversion: It is also a key bias. It is based on the concept that humans find it very difficult to accept loss and the state of denial is such that we infact believe that holding onto it for longer periods of time would turnaround things some way or the other. This bias has some major consequences in financial decision-making. For instance, over the years it has been seen that many companies have kept running loss-making units and destroying shareholder wealth to the level at which it was irreparable.The reasons behind the strength of this bias as scholars put it is the shame and regret and feeling the blame for the loss incurred. Individual investors are more prone to this professional investors, a study revealed that individual investors sell those stocks that start to perform well quite soon an d hang on loss-making stocks for longer periods of time hoping that things might take a u-turn. This problem as professional traders put it is named get evenitis. Hindsight bias: It is based on the concept that humans are prone to that feeling â€Å"I knew it all the while† or precisely hindsight bias.To correct this bias is also very difficult because it’s natural for us to make differing conclusions regarding what happened in the past even though those decisions would have been correct according to the data and circumstances at hand then. For example, these days since the global economy is in recession even a layman is heard that this was inevitable. Individual investors are prone to this bias out of human nature, as for institutional investors they are less prone to this because they would be having greater access to information all the time .Over-confidence bias: Humans are naturally over-confident about their abilities normally. This further leads to over optimism i. e. we normally feel that we can be successful in most of our endeavors or do the right thing in most of the situations. However in reality that is not possible. Moreover the more information or data one gathers regarding a task, the more that person feels in greater control this is called Illusion of knowledge. Practically the biggest setback that one has to deal with results unfolds is that they are quite different than what was expected.Individual investors are much less prone to this bias as compared to institutional investors which suffer a lot more, because the over-confidence of a team of managers would prove more lethal financially. For example, 3Com which acquired US Robotics in 2000 made an IPO of its division that made the famous Palm pilots. Although the share prices went as high as $165 making 3Com the fourth largest technology firm then but announcement of a forthcoming product without the infrastructure yet in place saw its share prices dramatically fall to $1. 35 in 2001.This financial blunder was a result of a combined over-optimism of the then senior management. INVESTMENT BELIEFS: Characteristics of the Individual investor’s investment beliefs would be focused on limited aspects probably because they have limited knowledge of the market and they invest smaller amounts as compared to institutional investors. They would probably invest in companies that have good market reputation and which promise a good return within a short span of time. As for institutional investors their investment beliefs would be diverse since they are professionals.It would be important for them to take measures to avoid conflicts of interest. It would also be important for them to develop a clear view of capital markets in order to invest in companies that are expected to yield good returns . CONCLUSION: Behavioral finance has therefore highlighted that financial decision-making of both individual and institutional investors. The errors/mistakes made in yes ter-years both at the individual and organizational level if taken care of in future could result in making sound long-term decisions. WORKS CITED: Blanco. A.Behavioral Finance Possibilities and Limitations of Different Approaches. Wiesbaden, 2003 Fortune. Why CEOs Fail. February 10th 2009 Retrieved from :< http://money. cnn. com/magazines/fortune/>, 1999. Goldberg. J. Behavioral Finance. John Wiley, 2001. Montier. J. Behavioral Finance: Insights into Irrational Minds and Markets. J. Wiley. 2002. Owen. A. S. Behavioral Finance and the Decision to Invest in High Tech Stocks. School of Finance and Economics, University of Technology, 2002 Pompian. M. M. Behavioral Finance and Wealth Management: How to Build Optimal Portfolios That Account for Investor Biases.John Wiley and Sons, 2006. Redhead. K. Personal Finance and Investments: A Behavioral Finance Perspective. Routledge, 2008 Shefrin. H. Behavioral Finance. Edward Elgar Pub, 2001. Shleifer . A. Inefficient Markets: An Introduction to Behavioral Finance. Oxford University Press US, 2000. Stanyer. P, Dimson. E. The Economist Guide to Investment Strategy: How to Understand Markets, Risk, Rewards and Behaviour. Bloomberg Press, 2006. Taffler. J. R. (2001). Management Focus. Thaler. H. R. (1993). Advances in Behavioral Finance. Russell Sage Foundation

American History - 9 Essay Example | Topics and Well Written Essays - 1250 words - 1

American History - 9 - Essay Example fact that this extra labor was a necessity and had to be provided from somewhere; hence, it was logical to turn to women in order to accomplish this task. Although there exist many images within the mind of the American history student with regards to the level and effect of this mobilization, one thing that should be carefully noted the fact that many of the jobs that have been typified and stereotyped with regards to women like Nancy the Riveter and others were more or less rare. Rather than such situations being the norm they were the exception. However, such a fact does not seek to delegitimize the fact that women participated heavily in sectors of production and the economy that they previously had not. This led to many things both before during and after the war’s conclusion. One of these was the fact that for the first time in American history women were able to actively pursue work outside the home as a means of both developing their horizons and pursuing a career. Although the topic of wartime propaganda has often been discussed in history courses and in society as a function of how governments seek to establish the idea of the â€Å"enemy† in the minds of their populace, the way in which segment 24-7 brought home the realization that the wartime machine actively sought to portray the Japanese (and to a lesser extent the Germans) as subhuman rapists and animals was especially striking. As such, equally captivating was the fact that topics as unrelated as venereal disease could be related somehow to the Axis Powers. In this way the populace can quickly form a strong and lasting link between every negative aspect of the current world and seek to attribute this in some way to â€Å"the enemy†. Although a great deal of academic ink has been expended in seeking to understand how Nazi Germany performed a similar effect within its own populace with relation to seeking to ascribe all of society’s ills upon the Jewish populations of Europe, fairly little

Cultural Awareness on Iran Research Paper Example | Topics and Well Written Essays - 1750 words

Cultural Awareness on Iran - Research Paper Example Iran possesses a unique culture that traverses across several elements. Culture is an aspect that achieves definition from different entities. Iranian culture belongs to the larger Persian identity that defines most countries in the same region. Persian culture forms one of the richest compositions in the world. This relates to literature, architecture and live customs that date back to three thousand years ago in the Zoroastrian age. Throughout civilization, this culture transferred to the eastern and western nations. It is notable that many western celebrations achieve their articulation from Persian culture. Art is an imminent feature of Persian culture. Art and culture interweave to form a prominent civilization. This reveals in the form of exquisite carpets, distinct architecture, subtle soulful music, blue mosques and brilliant literary work. Notably, Farsi forms one of the richest languages in the world. ... Bakhtiaris and Lurs speak the Luri dialect. There are semi nomadic people who speak the Baluchi language. They live in the adjacent areas, of Pakistan and Afghanistan, in the southeastern Iran. Twenty eight percent, of the Iranians, speak various Turkish dialects. Arabs and Assyrians mostly speak Semitic languages. Islam defines the core of Iranian culture and life. Islam forms the religion that governs political economic, legal and personal lives of Iran. In this aspect, Prophet Muhammad is the last God emissary that brought revelation to mankind. Islam provides that this message belongs to the whole of mankind. As in the example, of the Bible, Quran is the basic guidance of their religious life. Unlike the provision of the Bible, Quran strongly dictates many aspects of Iranian lives. Muslims have notable obligations such as praying five times a day. Friday forms a holy day in the Muslim worship calendar. Islam is an influential religion that dictates closure of companies on Thursda ys. In the holy month, of Ramadan, all Muslims are mandated to fast. Notably, Iran forms the only Shi’ite state of all the Muslim countries. Sunnis believe that the successive leadership of the Muslims did not have to come from the Prophet Muhammad family. The Shi’ite believes that the Islam leadership should have been monarchial. Iran and Iraq possess the highest population of Shi’ites. In terms of family values, the family forms the core social unit. In an Iranian setting, a family forms a very private unit. This is a distinct aspect whereby female relatives face protection from outside influences. A clear manifestation, of this cultural aspect, pertains to the taboo of asking a question about female relatives and someone’s life.

Geometric model for motion of curves specified by acceleration Research Proposal

Geometric model for motion of curves specified by acceleration - Research Proposal Example The intention of this study a geometric model generally that deals with the kinematics of a one dimensional manifold in a higher dimensional space. The model is specified by acceleration fields which are local or global functions of the intrinsic quantities of the manifold. This research intends to examine the evolution of one dimensional manifold embedded in the Euclidean space as it evolves under a stochastic flow of diffeomorphisms. Within the manifold, motion depends on the intrinsic invariants immersed in the space. During the course of this research, we will obtain the system of differential equations that governs the motion of the curve, keeping in mind that the processes driving the stochastic flows are chosen to be the most common class of Gaussian processes with stationary increments in time, which is the family of fractional Brownian motions with Hurst parameter. A family of random mappings is called a stochastic (Brownian) flow and is formulated as follows: â€Å"É ¸st, 0 ÍŸ É ¸st, for each s ÍŸ É ¸ut Í ¦ É ¸su = É ¸st, for all s ÍŸ É ¸tt is the identity map on Rn for all t. É ¸s1t1, É ¸s2t2, †¦, É ¸sntn are independent if s1 ÍŸ Using some applications to give geometric meanings to each solution to the governing system of (Partial Differential Equations) PDE,s corresponding to the model length and local time investigated, this profile will also demonstrate how the geometric problem can be transformed to a fully nonlinear parabolic system of equations for the curvature, the position, and orientation. This research will also examine the primary curvature properties developed during the evolution of curves. Another facet of the study will explore the evolution of derive time equations using the Frenet frame. Further derive time equations will be determined regarding the intrinsic quantities satisfied by curves. The investigation will also propose a model using the solution of the evolution equation for the curvature and torsion and the Fundamental theorem for space curves to

The Effects of Equality Act 2010 on NHS Employment Dissertation

The Effects of Equality Act 2010 on NHS Employment - Dissertation Example Equality act 2010 all the public service organisations operating in the UK directly or indirectly. The company's have to reframe their customer service standards, change the method of complaint handling and pay more attention to employee related issues. Every company has to support a report ensuring there is no gender-based, race-based or disability-based discrimination in their office proving the same through statistical data (Briefing 74, 2010).NHS or National Health Service is a very famous trust providing health services for certain people in the UK. The trust handles nearly 9 million telephone calls a year and over 1.5 million website oriented requests. Over 3000 staff works with NHS answering the telephone calls, booking appointments and attending emergency cases (NHS Direct, 2011). People from different type of classes, races and financial background call NHS daily. NHS is the best organisation to monitor how the equality act 2010 affects the employment strategies of an organi sation directly and indirectly. Before dwelling deep into the research methodology let us analyse the history of the Equality act 2010 in detail.The Equality act 2010 was framed after precise evaluation of various political and social circumstances. The team of experts analysed the historical basis on which the previous laws were formed and eliminated over 100 small classes and subsections to grow them all under one single act. Several notable pieces of antidiscrimination laws like Equal Pay Act 1970 The Sex Discrimination.

Final Exam MGT 123 Essay Example | Topics and Well Written Essays - 1000 words

Final Exam MGT 123 - Essay Example 49). The system includes the private, public, and government finance systems that have a direct influence on each financial space. Human resource is the business component that entails the knowledge, the skills, and the motivation of people (2013, p. 67). Unlike other factors of production, human resource improves with age and experience, hence termed as the most crucial facet that holds the advantage for an organisations business objectives. The human resource can be used to mobilize other resources that will help achieve organisations profitability goals. Manufacturing encompasses the process of converting raw materials, parts, or components into finished products that meet customer specifications and expectations (2013, p. 92). Manufacturing involves the collaboration between human resource and machines in a well-defined structure to realize production. The prosperity of an enterprise relies on the seamless integration of the four facets discussed, because of the strong interrelationship between them. Human resource plays a pivotal role because it stimulates manufacturing based on the market specifications, after that creating the finance that will help in sustaining the enterprise. Marketing helps in guiding detailed manufacturing specifications that will meet the clients needs. The mutual relationship between the four parts will channel the organisations objectives to its target when they are implemented under good business leadership from the human resource (2013, p. 109). In marketing, the information of the target market regarding its demographics, segments, needs, and purchasing decisions will help define pricing, promotion, and the most strategic places for the business. The other information regarding the strengths and the weaknesses of the competition will help in designing products that leverage the competition to the benefit of the company (2013, p. 152). Pricing information will help in developing a proficient pricing strategy

Carbon Footprint Essay Example | Topics and Well Written Essays - 500 words

Carbon Footprint - Essay Example rpool to work, take public transportation, turn off lights, reduce waste, plant trees, use rechargeable batteries, ride bike, reduce waste, print double sided, eat low carbon diet, go organic and buy electric vehicle. By using a more efficient vehicle my emissions will reduce, plants will help in releasing oxygen and giving out carbon dioxide, bike does not have any emission unlike using a vehicle (Ham, et al. 2000). Emissions are also reduced by carpooling even though by driving we increase emission but the number of sources will have reduced. Electric vehicles are more efficient and greener. I will also ensure my engine efficiency by managing my driving speed as the faster you drive the less your engine becomes and by doing this I will level off emissions on freeways. By using public transportation, I will eliminate the emissions from my vehicle. By going organic, I will reduce the chemical toxins in the environment (Ramseur, et al 2008). A day that I chose to reduce my emissions by 50%, the specific changes that I made were, switched from T12 lights to T8 lights, eat a low carbon diet, take public transport to work, ride my bike, reduce my waste, turn off lights. By switching to T8 lights from T12 lights I was able to reduce the power consumption in my house (Pal, et al. 2014). My diet for that day was also of low carbon diet and this helped to reduce my food emission. By taking a public transport I did not have any emission from my vehicle for that day. After work I used my bike to go shopping and this was helpful because it does not have any emission, I tried very hard to recycle what I could so as to reduce my waste of the day. By turning off the lights that I did not require, I greatly reduced my power consumption of the day. I succeeded in all I had planned. I succeeded because I was determined to achieve that even though it was not easy. It only requires dedication and discipline and I had both. It was I little bit hard for me. Like I am used to driving