The document provides an introduction to behavioral finance, including:
1) Behavioral finance uses insights from psychology to understand puzzling stock market phenomena not explained by traditional finance which assumes rational markets and investors.
2) Some key objectives of behavioral finance are to review issues with standard finance, examine theories of both approaches, and identify investor personalities.
3) Major figures who helped develop behavioral finance include Daniel Kahneman and Amos Tversky who formulated prospect theory as an alternative to models assuming rational choices.
As an Investment Advisor, you will have to play an important role in enabling your clients to reach their financial goals without the emotions of fear or greed playing havoc. It is essential to understand Behavioural Finance, especially Heuristics and Biases that creep into financial decision making.
As an Investment Advisor, you will have to play an important role in enabling your clients to reach their financial goals without the emotions of fear or greed playing havoc. It is essential to understand Behavioural Finance, especially Heuristics and Biases that creep into financial decision making.
Financial system and markets:
objectives of financial system-
Concepts of financial system-
Financial concepts-
Development of financial systems in India-
Weakness of Indian financial system
Abstract
The idea of an Efficient Market first came from the French mathematician Louis Bachelier in 1900: « The theory of speculation ».
Bachelier argued that there is no useful information in past stock prices that can help predicting future prices and proposed a theory for financial options’ valuation based on Fourier’s law and Brownian’s motions (time series).
Bachelier’s work get popular in the 60s during the computer’s era.
In 1965, Eugene Fama published a dissertation arguing for the random walk hypothesis (Stock market’s prices evolve randomly: prices cannot be predicted using past data).
In 1970, Fama published a review of the theory and empirical evidences
The EMH (Efficient Market Hypothesis): Financial markets are efficient at processing information. Consequently, the prices of securities is a correct representation of all information available at any time.
Weak:
Not possible to earn superior profits (risk adjusted) based on the knowledge of past prices and returns.
Semi-strong:
Not possible to earn superior profits using all information publicly available.
Strong:
Not possible to earn superior profit using all publicly and inside information.
The CAPM describes the relationship between market risks and expected return for a security i (also called cost of equity), E(Re_i):
Re_i = Rf – Bi(Rm – Rf)
With:
Rf = Risk free rate (typically government bond rate)
Rm = Expected return for the whole market
Bi = The volatility risk of the security i compared to the whole market
(Rm – Rf) is consequently the market risk premium
According to the EMH, for a well-diversified portfolio, expected returns can only reflect those of the market as a whole. Consequently, in the CAPM formula, It would involves that for a diversified-enough portfolio: β = 1 so Re = Rm
Investors want to value companies before making investment decisions.
A typical way to do so is to use the Discounted Cash Flow (DCF) method:
See also: Prospect theory, disposition effect, heuristic, framing, mental accounting, Home bias, representativeness, conservatism, availability, greater fool theory, self attribution theory, anchoring, ambiguity aversion, winner's curse, managerial miscalibration and misconception, Equity premium puzzle, market anomalies, excess volatility, Bubbles, herding, limited liabilities, Fama French three 3 factors model.
Many investors mistakenly base the success of their portfolios on returns alone. Few consider the risk that they took to achieve those returns. Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different. Which one is best for you? Why should you care? Let's find out.
Portfolio performance measures should be a key aspect of the investment decision process. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture, which may inadvertently lead to clouded investment decisions.
Behavioral finance and investment decisionaashima1806
Behavioral Finance is all related to the behavior of the investor at the time of investing in different market conditions.. same is exhibited in our presentation by compiling different questions related to investment for different investors on the basis of different age groups...
investment decisions, risk and uncertainity, types of risk, techniques of measuring risk, cost of capital, importance, factors affecting cost of capital, computation of cost of capital, capital structure, capital structure theories, dividend theories, walter model, gordon model, mm model, working capital management, types of working capital, factors influencing working capital, preparation of cash budget, problems on working capital, corporate valuation,methods
For Videos use the links below
0 Course Introduction:: https://www.youtube.com/watch?v=9km4aXTus5c
1 Financial system and Environment : https://www.youtube.com/watch?v=BC2bAftm43c
2 Participants in a Financial System: https://www.youtube.com/watch?v=IEv_y7_aR7o
3 Functions of a Financial System: https://www.youtube.com/watch?v=T73-Dd8RM4I
4 Financial System and its components: https://www.youtube.com/watch?v=ovkAjEO8YAw
5 Efficiency of a financial system: https://www.youtube.com/watch?v=8xEUtvKYvPc
Financial system and markets:
objectives of financial system-
Concepts of financial system-
Financial concepts-
Development of financial systems in India-
Weakness of Indian financial system
Abstract
The idea of an Efficient Market first came from the French mathematician Louis Bachelier in 1900: « The theory of speculation ».
Bachelier argued that there is no useful information in past stock prices that can help predicting future prices and proposed a theory for financial options’ valuation based on Fourier’s law and Brownian’s motions (time series).
Bachelier’s work get popular in the 60s during the computer’s era.
In 1965, Eugene Fama published a dissertation arguing for the random walk hypothesis (Stock market’s prices evolve randomly: prices cannot be predicted using past data).
In 1970, Fama published a review of the theory and empirical evidences
The EMH (Efficient Market Hypothesis): Financial markets are efficient at processing information. Consequently, the prices of securities is a correct representation of all information available at any time.
Weak:
Not possible to earn superior profits (risk adjusted) based on the knowledge of past prices and returns.
Semi-strong:
Not possible to earn superior profits using all information publicly available.
Strong:
Not possible to earn superior profit using all publicly and inside information.
The CAPM describes the relationship between market risks and expected return for a security i (also called cost of equity), E(Re_i):
Re_i = Rf – Bi(Rm – Rf)
With:
Rf = Risk free rate (typically government bond rate)
Rm = Expected return for the whole market
Bi = The volatility risk of the security i compared to the whole market
(Rm – Rf) is consequently the market risk premium
According to the EMH, for a well-diversified portfolio, expected returns can only reflect those of the market as a whole. Consequently, in the CAPM formula, It would involves that for a diversified-enough portfolio: β = 1 so Re = Rm
Investors want to value companies before making investment decisions.
A typical way to do so is to use the Discounted Cash Flow (DCF) method:
See also: Prospect theory, disposition effect, heuristic, framing, mental accounting, Home bias, representativeness, conservatism, availability, greater fool theory, self attribution theory, anchoring, ambiguity aversion, winner's curse, managerial miscalibration and misconception, Equity premium puzzle, market anomalies, excess volatility, Bubbles, herding, limited liabilities, Fama French three 3 factors model.
Many investors mistakenly base the success of their portfolios on returns alone. Few consider the risk that they took to achieve those returns. Since the 1960s, investors have known how to quantify and measure risk with the variability of returns, but no single measure actually looked at both risk and return together. Today, we have three sets of performance measurement tools to assist us with our portfolio evaluations. The Treynor, Sharpe and Jensen ratios combine risk and return performance into a single value, but each is slightly different. Which one is best for you? Why should you care? Let's find out.
Portfolio performance measures should be a key aspect of the investment decision process. These tools provide the necessary information for investors to assess how effectively their money has been invested (or may be invested). Remember, portfolio returns are only part of the story. Without evaluating risk-adjusted returns, an investor cannot possibly see the whole investment picture, which may inadvertently lead to clouded investment decisions.
Behavioral finance and investment decisionaashima1806
Behavioral Finance is all related to the behavior of the investor at the time of investing in different market conditions.. same is exhibited in our presentation by compiling different questions related to investment for different investors on the basis of different age groups...
investment decisions, risk and uncertainity, types of risk, techniques of measuring risk, cost of capital, importance, factors affecting cost of capital, computation of cost of capital, capital structure, capital structure theories, dividend theories, walter model, gordon model, mm model, working capital management, types of working capital, factors influencing working capital, preparation of cash budget, problems on working capital, corporate valuation,methods
For Videos use the links below
0 Course Introduction:: https://www.youtube.com/watch?v=9km4aXTus5c
1 Financial system and Environment : https://www.youtube.com/watch?v=BC2bAftm43c
2 Participants in a Financial System: https://www.youtube.com/watch?v=IEv_y7_aR7o
3 Functions of a Financial System: https://www.youtube.com/watch?v=T73-Dd8RM4I
4 Financial System and its components: https://www.youtube.com/watch?v=ovkAjEO8YAw
5 Efficiency of a financial system: https://www.youtube.com/watch?v=8xEUtvKYvPc
Why Behavioral Finance is Helpful for Investors to Decision Making Process?QUESTJOURNAL
ABSTRACT: Behavioral finance is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets. It is of interest because it helps explain why and how markets might be inefficient.
This is a Behavioral Finance Lesson material which delivered by me for PhD students of Faculty of Business Administration in Karvina, Silesian University.
Behavioural Finance - An Introspection Of Investor PsychologyTrading Game Pty Ltd
Investors always try to make rational decision while analyzing and interpreting information collected from various sources for different investment avenues to arrive at an optimal investment decision. But at the same time they are influenced by various psychological factors that influence them internally and bias their investment decision. Linter (1998) studied the various factors that influence internally the informed investment decision and included them under the discipline of behavioural finance. Behavioural finance studies how people make investment decision and influenced by internal factors and bias. The main purpose of the paper is to assess impact of behavioural factors over mutual fund investment decision made by investors in Raipur city.
Bridging the Gap between Psychology and Economics: The Role of Behavioral Fin...inventionjournals
This article is a descriptive presentation of how behavioral finance plays key role in providing insight into how individuals’ investment behavior typically deviates from traditional economic theories. The efficient market hypothesis (EMH) and capital asset pricing model (CAPM) theories have gained prominence in modern finance platform. The adequacy of these popular, rational-based behavior theories has however, remained skeptical among many scholars including Daniel Kahneman, Amos Tversky, and Richard H. Thaler. While the EMH and CAPM theories have contributed significantly to the investment world, some scholars contend the theories fail to fully explain certain inconsistent behaviors exhibited in the investment world. Behavioral finance is a new theory that attempts to fill the void between psychology and economics by providing a better understanding of investor behavior through the theories of psychology. Investment decisions are impacted by an array of irrational behavioral biases. The article identifies some finance and economic theory anomalies such as the January effect, equity premium puzzle, and others, which shift away from the traditional economic theories. Understanding these anomalies not only would assist individuals have a sense of how investors generally behave in the investment arena but also would help in efficient capital allocation.
Role of Behavioural Finance in the Financial Marketinventionjournals
There are mainly two disciplines of financial market study viz. Conventional Finance and the recent development known as Behavioural Finance. Conventional finance foundation is mainly based on efficient market concept, Investor rationality concept and the modern portfolio theory developed by Markowitz. But till 1990 the conventional finance theories were not so been challenged. But from mid 90’s researchers have shows many shortcomings of the existing theory and particularly challenged the investor rationality concept. As a result a new paradigm known as behavioural finance has been developed. In this paper an attempt has been made to highlight the shortcomings of the traditional finance theories as pointed out by behavioural finance supporters and also a discussion on the significance of behavioural finance.
As with behavioural economics, the conventional view of finance assumes that markets are efficient and that the price of shares, bonds and other financial instruments are a reflection of the fundamental economic values that they represent. Behavioural finance is all about understanding why and how financial markets are inefficient. If there is a difference between the market price of a share or bond and its fundamental value then in conventional economics no one can make money in financial markets by exploiting the difference.
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The Roman Empire A Historical Colossus.pdfkaushalkr1407
The Roman Empire, a vast and enduring power, stands as one of history's most remarkable civilizations, leaving an indelible imprint on the world. It emerged from the Roman Republic, transitioning into an imperial powerhouse under the leadership of Augustus Caesar in 27 BCE. This transformation marked the beginning of an era defined by unprecedented territorial expansion, architectural marvels, and profound cultural influence.
The empire's roots lie in the city of Rome, founded, according to legend, by Romulus in 753 BCE. Over centuries, Rome evolved from a small settlement to a formidable republic, characterized by a complex political system with elected officials and checks on power. However, internal strife, class conflicts, and military ambitions paved the way for the end of the Republic. Julius Caesar’s dictatorship and subsequent assassination in 44 BCE created a power vacuum, leading to a civil war. Octavian, later Augustus, emerged victorious, heralding the Roman Empire’s birth.
Under Augustus, the empire experienced the Pax Romana, a 200-year period of relative peace and stability. Augustus reformed the military, established efficient administrative systems, and initiated grand construction projects. The empire's borders expanded, encompassing territories from Britain to Egypt and from Spain to the Euphrates. Roman legions, renowned for their discipline and engineering prowess, secured and maintained these vast territories, building roads, fortifications, and cities that facilitated control and integration.
The Roman Empire’s society was hierarchical, with a rigid class system. At the top were the patricians, wealthy elites who held significant political power. Below them were the plebeians, free citizens with limited political influence, and the vast numbers of slaves who formed the backbone of the economy. The family unit was central, governed by the paterfamilias, the male head who held absolute authority.
Culturally, the Romans were eclectic, absorbing and adapting elements from the civilizations they encountered, particularly the Greeks. Roman art, literature, and philosophy reflected this synthesis, creating a rich cultural tapestry. Latin, the Roman language, became the lingua franca of the Western world, influencing numerous modern languages.
Roman architecture and engineering achievements were monumental. They perfected the arch, vault, and dome, constructing enduring structures like the Colosseum, Pantheon, and aqueducts. These engineering marvels not only showcased Roman ingenuity but also served practical purposes, from public entertainment to water supply.
The Art Pastor's Guide to Sabbath | Steve ThomasonSteve Thomason
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Synthetic Fiber Construction in lab .pptxPavel ( NSTU)
Synthetic fiber production is a fascinating and complex field that blends chemistry, engineering, and environmental science. By understanding these aspects, students can gain a comprehensive view of synthetic fiber production, its impact on society and the environment, and the potential for future innovations. Synthetic fibers play a crucial role in modern society, impacting various aspects of daily life, industry, and the environment. ynthetic fibers are integral to modern life, offering a range of benefits from cost-effectiveness and versatility to innovative applications and performance characteristics. While they pose environmental challenges, ongoing research and development aim to create more sustainable and eco-friendly alternatives. Understanding the importance of synthetic fibers helps in appreciating their role in the economy, industry, and daily life, while also emphasizing the need for sustainable practices and innovation.
The French Revolution, which began in 1789, was a period of radical social and political upheaval in France. It marked the decline of absolute monarchies, the rise of secular and democratic republics, and the eventual rise of Napoleon Bonaparte. This revolutionary period is crucial in understanding the transition from feudalism to modernity in Europe.
For more information, visit-www.vavaclasses.com
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2024.06.01 Introducing a competency framework for languag learning materials ...Sandy Millin
http://sandymillin.wordpress.com/iateflwebinar2024
Published classroom materials form the basis of syllabuses, drive teacher professional development, and have a potentially huge influence on learners, teachers and education systems. All teachers also create their own materials, whether a few sentences on a blackboard, a highly-structured fully-realised online course, or anything in between. Despite this, the knowledge and skills needed to create effective language learning materials are rarely part of teacher training, and are mostly learnt by trial and error.
Knowledge and skills frameworks, generally called competency frameworks, for ELT teachers, trainers and managers have existed for a few years now. However, until I created one for my MA dissertation, there wasn’t one drawing together what we need to know and do to be able to effectively produce language learning materials.
This webinar will introduce you to my framework, highlighting the key competencies I identified from my research. It will also show how anybody involved in language teaching (any language, not just English!), teacher training, managing schools or developing language learning materials can benefit from using the framework.
2. LEARNING OBJECTIVES
Explain Behavioral finance as “Modern Finance”
Explain the Nature and Scope of Behavioral
Finance
Describe the Objectives of Behavioral Finance
Explain the history of Behavioral Finance
4. MEANING
Behavioral Finance is a concept developed with the inputs
taken from the field of psychology and finance, which
tries to understand various puzzling observations in stock
markets with better explanations.
Behavioral finance is a new area of financial research that
explores the psychological factors affecting investment
decisions.
It attempts to explain market anomalies and other market
activity that is not explained by the efficient market
hypothesis.
It is a field of finance that proposes psychology-based
theories to explain stock market anomalies.
5. DEFINITION Daniel Kahneman and Amos Tversky – are considered as the
fathers of Behavioral Finance
“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.”
6. BEHAVIORAL FINANCE: INTRODUCTION
Nature of Behavioral Finance
Behavioral Finance is just not a part of
finance.
It is something which is much broader
and wider and includes the insights
from behavioral economics,
psychology and microeconomic theory.
The main theme of the traditional
finance is to avoid all the possible
effects of individual’s personality and
mindset.
7. Behavioral finance is divided into
two branches.
Micro Behavioral Finance
Macro Behavioral Finance
Behavioral Finance as a Science
Behavioral Finance as an Art
Practically it is an Art
8. BEHAVIORAL FINANCE: INTRODUCTION
Scope
To understand the Reasons of Market
Anomalies
To Identify Investor’s Personalities
Helps to identify the risks and their
hedging strategies
Provides an explanation to various
corporate activities
To enhance the skill set of investment
advisors
9. Objectives
1. To review the debatable issues in Standard Finance and the interest
of stakeholders.
2. To examine the relationship between theories of Standard Finance
and Behavioral Finance.
3. To examine the various social responsibilities of the subject.
4. To discuss emerging issues in the financial world.
5. To discuss the development of new financial instruments
6. To familiarize themselves with trend of changed events over years,
across various economies.
7. To examine the contagion effect of various events.
8. An effort towards more elaborated identification of investor’s
personalities.
9. More emphasis on optimum Asset Allocation/portfolio
10. Behavioral Approach is an approach to
understand the movements in financial markets,
which is contrary to Efficient market Hypothesis
(EMH), which has been the key preposition of
traditional finance, which believed that the
financial markets are efficient and highly
analytical. Fama defined efficient markets are
those markets in which, “ Security prices always
fully reflect the available information.”
Classical view, Behavioral finance assumes that
the investors are irrational and due to combined
and multiplied effect of investor’s personalities,
markets will not always be efficient. This
inefficiency of financial markets causes the stock
prices to deviate from the predictions of
11. BEHAVIORAL FINANCE: MAJOR CONTRIBUTORS IN
BEHAVIORAL FINANCE
Alan Greenspan, the Federal Reserve Chairman for
raising concern for Irrational exuberance with respect to
Japan in his lecture in 1996.
Professor Richard Thaler, from University of Chicago
Graduate School of Business, studied investors behavior
responsible for the creation of Tech Bubble.
Professor Hersh Shefrin from University in Santa Clara,
California contributed in the field by writing the book
“Beyond Greed and Fear : Understanding behavioral
Finance and the Psychology of Investing”.
Professor Daniel Kahneman and Amos Tversky
formulated the Prospect Theory. As a alternative to
standard finance, prospect theory described that the
human judgments are influenced by Heuristic and
disagree with the basic principles of probability
12. BEHAVIORAL FINANCE: MAJOR RESEARCH WORK
IN BEHAVIORAL FINANCE
While dealing with various investment options, the fundamental question people
face in their asset management is that “what is the best strategy for investing in
the stock market and to what extent can the past movements in stock prices
be used to make predictions of the future prices? Is it better to be focused on
‘fundamentals’, whatever they are and whatever way they have been
measured, or to follow the ‘psychology of the market.”
Markowitz theorem and Markowitz’s portfolio selection Markowitz (1952).
The assumption of being risk averse in standard finance is seriously challenged by
Friedman and Savage (1948).
The expected utility theory, developed by Von Neumann and Morgenstern (1944)
The Expected Utility Theory (EU) was developed by Von Neumann and
Morgenstern in 1944. Hayek (1937)
13. BEHAVIORAL FINANCE: MAJOR RESEARCH WORK
IN BEHAVIORAL FINANCE
Ramsey (1928) was among the first to frame some models for
individual’s utility as the concave function of consumption,
which giving rise to numerous of such concave functions.
Tversky and Kahneman (1981) found that, contrary to the
expected utility theory, people assign different weights to
gains and losses
Kahneman and Tverksy (1979) derived the observation that
the marginal value of both gains and losses decreases with
their magnitude.
Harrison and Kreps (1978) argued that some beliefs force
agents to buy stocks even though they believe stocks are
already above their ‘fundamental value’.
Two parameters, centrality and between ness are discussed
by Freeman (1977) regarding the trade of securities.
Ellsberg (1961) first identified the concept of ambiguity
aversion, which occurs when people prefer to bet on lotteries
14. BEHAVIORAL FINANCE: MAJOR RESEARCH WORK
IN BEHAVIORAL FINANCE
Behavioral finance is defined by Shefrin (1999) as, “A rapidly growing
area that deals with the influence of psychology on the behavior of
financial practitioners”.
demographical features systematically influence individual’s behavior
and their investment decision. “Modern financial economics at times
behave with extreme rationality; but, markets don’t”. As explained by
Barber and Odean (2001).
Cumulative Prospect Theory coined by Tversky and Kahneman (1992)
provided a good explanation for the emergence of deposit accounts by
simultaneously integrating the risk-averse and risk-seeking behavior of
investors.
and many more……..
15. Weak Form Semi Strong
Form
Strong Form
Historical
Information is
available
Future prices of
stocks can not be
predicted
Technical
Analysis is of
little or no value
Stock prices adjust
all publically
available
information
Few Insiders earn
profits, who adjust
their decision
making according
to available
information
All information
(private & public)
is fully reflected in
the stock prices
Investors respond
quickly
Insider information
is of no value
16. EFFICIENT MARKET HYPOTHESIS
Overreaction of the market
Reversal to mean returns
Delayed absorption of new information
Low P/E Effect
Small firm effect
The weekend effect
Hence calls for a need of Behavioral Finance
17. BEHAVIORAL FINANCE
Standard Finance Behavioral Finance
Standard Finance believes in
existence of Rational Markets and
Rational investors
Behavioral Finance believe in
existence of irrational markets and
irrational Investors
It helps in building a rational
portfolio
Behavioral finance helps in building
an optimal portfolio
Standard Finance theories rest on
the assumptions that oversimplify
the real market conditions
Explanations of behavioral finance
are in light with the real problems
associated with human psychology
Standard Finance explains how
investor “should” behave
Behavioral Finance explains how
investor “does” behave
Standard Finance assumptions
believe in idealized financial
Behavioral finance assumptions
believe in observed financial
