Your SlideShare is downloading. ×
Behavioural finance b.v.raghunandan
Upcoming SlideShare
Loading in...5

Thanks for flagging this SlideShare!

Oops! An error has occurred.


Saving this for later?

Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime - even offline.

Text the download link to your phone

Standard text messaging rates apply

Behavioural finance b.v.raghunandan


Published on

Published in: Economy & Finance, Business

  • Be the first to comment

  • Be the first to like this

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

No notes for slide


  • 1. Behavioural Finance -B.V.Raghunandan, SVS College, Bantwal MBA Department, Alva’s College of Engineering, Moodbidri August 20, 2013
  • 2. Bi-Polar World • Physical Sciences like Physics, Chemistry, Mathema tics-Precision and Quantitative • Non-Physical Sciences like Botany, Zoology, Medicines and Social Sciences- Imprecise and Qualitative
  • 3. Bi-Polar Finance • Standard Finance -Adding Precision to the Art of Investment-Homo Economicus • Behavioural Finance- The Imprecise Art and the Heuristic Attitude
  • 4. Standard Finance • Modigliani and Miller’s Arbitrage Theory • Markowitz’s Diversified Portfolio • Asset Allocation of Sharpe • Black-Schole’s Option Pricing
  • 5. Miller-Modigliani Arbitrage Arbitrage Theory of Franco Modigliani & Merton Miller
  • 6. Harry Max Markowitz • Modern Portfolio Theory- Risk, Return, Correlation and Diversification
  • 7. William Forsyth Sharpe • Capital Asset Pricing Model • Sharpe Ratio for risk adjusted performance analysis • Binomial Method of Option Valuation • Returns Based Style Analysis
  • 8. Fischer Black-Myron S.Scholes • Valuation of Options • Hedging • Wide Usage • Option Price Calculator
  • 9. Efficient Market Hypothesis • People behave rationally (Homo Economicus) • Maximise the expected profit or utility • Trying to predict future value of individual securities • Important current information is freely available to all the participants (Weak, Semi-Strong and Strong Markets) • Free Availability of information means there is no cost involved in getting the information
  • 10. Behavioural Finance • BF is the study of the impact created by psychological factor on the activities of the investing public, traders, companies and the financial intermediaries
  • 11. Why Psychology? • Crowd Mentality • Childishness • Tension • Need to be Praised • Prove Smartness • Short Term View • Intolerance • Moody • Refusing to Take Decision • Acting on Tips • Escaping from Reality • TV/Internet • Individualistic • Creating a Virtual World • Destruction of Family • Diplomacy inside the House • Self-Centered Parents • Nuclear Personalities • Failing Health • Blinkers on the Eyes
  • 12. Authorities on Behavioural Finance • 1896- Gustave le Bon-’A Study of Popular Mind’ • 1912- Seldon-’Psychology of the Stock Market’-price changes depend upon mental attitude of the investing and trading public • 1956- Leon Festinger introduced Theory of Cognitive Dissonance in social psychology
  • 13. Prospect Theory • 1974-Amos Tversky & Daniel Kahneman described three heuristics when making judgement under uncertainty: • Representativeness • Availability: occurrences • anchoring and adjustment • Risk Aversion
  • 14. Import of the Theory – Explaining the apparent regularity in human behaviors when assessing risk under uncertainty. – People respond differently to equivalent situations depending on whether it is presented in the context of a loss or a gain. – Computation is based on losses and gains rather than final asset values – Investors are risk hesitant when chasing gains but become risk lovers when trying to avoid a loss
  • 15. Risk Aversion & Risk Seeking• Situation 1 Option a) A sure gain of Rs.2,000 Option b) 25% Chance to gain Rs.10,000 and 75% chance to gain nothing • Situation 2 a) A sure loss of Rs.5000 b) 75% chance to loss Rs.10,000 and 25% chance to lose nothing
  • 16. Richard Thaler: Regret Theory • Mental Accounting-1980 a) underweighting of opportunity costs b) failure to ignore sunk costs c) search behaviour, choosing not to choose and regret d) precommitment and self- control.
  • 17. Further Theories • 1980- Tversky and Kahneman- Problem Framing and preferences • 1981-Shiller- Volatility is too high for the future dividend • 1985- F.M.De Pont and Thaler-Overreaction of Stcok Market • 1988- Samuelson and Zeckhauser- Status Quo Bias • Many other Theories like Overconfidence etc
  • 18. Changes in Stock Market • Mutual Funds & Other Institutions • HNI • FII Activity • F & O Market • Regulation by SEBI • Monetary Policy of RBI • Government Policies • Scams • Consultants, Advisors and Media • Investment Trusts • Disinvestment • Technology • Many Players • Dominant Financial Services • Free Pricing of IPOs • Technical Analysis • Irrelevance of PE Ratios • Tips and Sentiments • Interim Financial Reporting
  • 19. THANK YOU