Successfully reported this slideshow.

Heuristics- Behavioural finance

8

Share

Loading in …3
×
1 of 20
1 of 20

Heuristics- Behavioural finance

8

Share

Download to read offline

A topic related to investment portfolio management.
About how a person behaves relating to stock market fluctuations.

A topic related to investment portfolio management.
About how a person behaves relating to stock market fluctuations.

More Related Content

Related Books

Free with a 14 day trial from Scribd

See all

Related Audiobooks

Free with a 14 day trial from Scribd

See all

Heuristics- Behavioural finance

  1. 1. By, P Vasavi B Venkat M Preethi Bhavani G Shravya Reddy B Rajesh Reddy S Nikhileshwar P Abhishek Behavioural Finance
  2. 2. What is Behavioral Finance?  A field of finance that proposes psychology-based theories to explain stock market anomalies. Within behavioral finance, it is assumed that the information structure and the characteristics of market participants systematically influence individuals' investment decisions as well as market outcomes.
  3. 3. AVERSION TO AMBIGUITY  In decision theory and economics, ambiguity aversion also known as uncertainty aversion describes a preference for known risks over unknown risks.
  4. 4. MENTAL ACCOUNTING  An economic concept established by economist Richard Thaler, which contends that individuals divide their current and future assets into separate, non-transferable portions. The theory purports individuals assign different levels of utility to each asset group, which affects their consumption decisions and other behaviors.
  5. 5. FRAMING  Framing is a cognitive heuristic in which people tend to reach conclusions based on the 'framework' within which a situation was presented.
  6. 6. AVAILABILITY BIAS  The giving of preference by decision makers to information and events that are more recent, that were observed personally, and were more memorable. This is because memorable events tend to be more magnified and are likely to cause an emotional reaction.
  7. 7. CONFIRMATION BIAS  In psychology and cognitive science, confirmation bias (or confirmatory bias) is a tendency to search for or interpret information in a way that confirms one's preconceptions, leading to statistical errors.
  8. 8. ANCHORING  The use of irrelevant information as a reference for evaluating or estimating some unknown value or information.  In this type, people stick to initial information and won’t let it go. They even do not want to accept new information.
  9. 9. INNUMERACY BIAS  Natural inability to cognitively process and evaluate probability and ratios is called innumeracy bias.  Difficulty in evaluation of ratios and probabilities.
  10. 10. GAMBLERS FALLACY  When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events.  This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future.
  11. 11. HINDSIGHT BIAS  A psychological phenomenon in which past events seem to be more prominent than they appeared while they were occurring.  A tendency to think that one would have known actual events were coming before they happened.
  12. 12. SELF ATTRIBUTION BIAS  Self-attribution bias occurs when people attribute successful outcomes to their own skill but blame unsuccessful outcomes on bad luck.
  13. 13. HERD BEHAVIOUR  It is the tendency for individuals to mimic the actions of a larger group. Individually, most people would not necessarily make the same choice. This is called herd behavior
  14. 14. REPRESENTATIVE BIAS  A Representativeness Bias is a cognitive bias in which an individual categorizes a situation based on a pattern of previous experiences or beliefs about the scenario. It can be useful when trying to make a quick decision but it can also be limiting because it leads to close-mindedness.
  15. 15. Possible mistakes Rudy’s clients would make..
  16. 16. Bob Miller  Illusion of control  Anchoring
  17. 17. Mary Swanson  Herd Behaviour
  18. 18. Jack and Kelly  Self attribution bias  Self protecting bias
  19. 19. Herb and Bark Nichols  Gamblers Fallacy
  20. 20. Client Profiles Client Age Investmen t horizon Objective Risk profile Portfolio Advice Bob Miller 42 23 Retire comfortably at 65 Teacher Growth 70 %equity 30% bonds No changes Mary Swanson 60+ 30 Stable income Retired professor 60 %equity 40%bonds $1million 5%gold 5%real estate Transfer Jack &Kelly Klein 35 30 Save for retirement Do not have lot of asstes 85%equity 15%bonds Buy more at market low Herb & Barb Nichols 50 10 Grow money Have short term liquidity needs $100000 75%equity 25%bonds No stock can fall to zero

×