Ppt

1. Fundamentals of Behavioral Finance
BYBY-
NAME= ANIKET ROY
COLLEGE ROLL= 2104013
UNIVERSITY ROLL= 12000921054
PAPER CODE= FM-303
PAPER NAME= BEHAVIORAL
FINANCE

2. 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

3. ▣ This field of study argues that people are not
nearly as rational as traditional finance theory
makes out. For investors who are curious about
how emotions and biases drive share prices,
behavioral finance offers some interesting
descriptions and explanations.

4. Behavioral finance is a field of finance that
proposes psychology-based theories to
explain stock market anomalies such as severe
rises or falls in stock price. Within behavioral
finance, it is assumed the information structure
and the characteristics of market participants
systematically influence individuals'
investment decisions as well as market
outcomes.

5.  Prospect theory
 Regret theory
 Anchoring
 Over-and under reaction

6. ▣ Meaning
–Tversky and Kanheman (1979) developed the theory
showing how people manage risk.
–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.
–Investors are risk hesitant when chasing gains but
become risk lovers when trying to avoid a loss

7. ▣ Meaning
◾ Emotional reaction to having made an error of
judgment.
◾ Investors avoid selling stocks that have gone down
in order to avoid the regret of having made a bad
investment and the embarrassment of reporting the
loss.
◾ They find it easier to follow the crowd and buy a
popular stock : if it subsequently goes down ,it can
be rationalized as everyone else owned it.
◾ Investors defer selling stock that have gone down in
value and accelerate the selling of stock that have
gone up.

8. • MEANING
– Anchoring is a phenomenon in which in the absence of
better information, investors assume current prices are
about right.
– Anchoring describes how individuals tend to focus on
recent behavior and give less weight to longer time
trends.
– People tend to give too much weight to recent experience,
extrapolating recent trends that are often at odds with
long run average and probabilities
– In the absence of any better information, past prices are
likely to be important determinants of prices today.
Therefore, the anchor is the most recently remembered
price

9. • The most robust finding in the psychology of judgment
needed to understand market anomalies is
overconfidence.
• People tend to exaggerate their talents and
underestimate the likelihood of bad outcomes over
which they have no control.
• The greater confidence a person has in himself, the
more risk there is of overconfidence.
• Managers overestimate the probability of success in
particular when they think of themselves as experts
• People tend to become more optimistic when the
market goes up and more pessimistic when the market
goes down