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Behavioral finance -_an_explanation Presentation Transcript

  • 1. Behavioral Finance - An Explanation to Irrational Investment Behaviour Dr. MALABIKA DEO Professor & Head of Commerce, PONDICHERRY CENTRAL UNIVERSITY, Kalapet Puducherry – 605 014. INDIA.
  • 2.
    • Behavioural Finance
    • Behavioural Finance is the study of influence of psychology on the financial decision making and it argues that the emotions of and mental errors cause the Mispricing.
    • Behavioural finance argues that emotions and sentiment play a crucial role in determining the behaviour of investors in the market place and very offen they act irrationally due to influence of psychological factor .
  • 3. Assumption of Behavioural Investors Traditional Finance Behavioural Finance Rational & Correct Heuristic (Rule of Thumb) Price reflects intrinsic value Frame dependence, social influence causes Mispricing Risk & Return – prime factors for investors Decision Risk & Return – frames Specific. Rational, Logical, Transparent & Objective Herd instinct, Emotional and Sentimental.
  • 4.
    • Arguments in favour of Behavioral Finance
      • More Realistic
      • Psychological Foundation
      • Increases Explanatory Power of Financial Models
      • Solves Empirical Puzzles of Traditional Finance
      • New approach to Traditional Finance
  • 5.
    • Basics of Theories of Behavioral Finance
      • Heuristic – Driven Biases
      • Frame Dependence
      • Emotional Inefficiencies
      • Market Inefficiencies
  • 6.
    • Heuristic – Driven Biases
    • It explains, how decision makers take decision without systematic collection and evaluation of information in the event of limited time
      • Representativeness
      • Over – Confidence
      • Anchoring
      • Gamblers Fallacy
      • Availability Biases
      • Aversion to Ambiguity
  • 7.
    • Frame Dependence
      • Prospect Theory
      • Mental Accounting
      • Narrow Framing
      • Shadow of Past
      • Behavioural Portfolio
  • 8.
    • Prospect Theories
      • Investors pay attention to change in each transaction than the total value.
      • People look at chances in terms of potential gain and losses in relation to specific reference point (Purchasing Power).
      • Underweighing outcomes that are probable, in comparisons to certain outcomes.
      • Value function concave for gains and convex for losses.
      • More pain for losses less happiness in gains.
  • 9.
    • Mental Accounting
    • Division of current and future asset into different groups are differently treated
    • Narrow framing
      • Un Due attention to short – term gains even in long horizon.
      • Over estimation of risk
  • 10.
    • Shadow of Past
    • Gain prompts people to take more risk Loss Makes people averse to take further risk .
    • Behavioral portfolio
    • Investors to hold their portfolio in a pyramid of assets based on the goals like safety, income and growth.
      • Options
      • Commercial Property
      • Stocks
      • Bonds
      • Residential House
      • Cash
  • 11.
    • Market Inefficiency
    • Investors trade on the basis of rumors, sentiment or noise not on fundamentals.
      • Buying Undervalued stocks - more risky
      • Not Selling Over priced stocks - more greedy
  • 12.
    • Emotional and Social Influence
      • Risk tolerance affected by Emotions and
      • Sentiments
      • Decision based on Herd Instinct than
      • Market Analyses
  • 13. THANK YOU