The chapter consists of Expected Utility Theory [EUT] and Rational Thought: Decision Making under Risk and Uncertainty - Expected Utility as a basis for Decision-Making – Theories Based on Expected Utility Concept – Investor Rationality and Market Efficiency. Self Deception – Forms of Over Confidence, Causes of Over Confidence, and other Forms of Self-Deception. Prospect Theory, Difference between EUT and Prospect Theory; Agency Theory; SP/A Theory; Framing, Mental Accounting; Error in Bernoulli’s Theory.
Expected utility theory and its examples. Making decisions under certainty is easy. The cause and effect are known, and the risk involved is minimal. What’s tough is making decisions under risk and uncertainty. The outcome is unpredictable because you don’t have all the information about the alternatives. Before we learn deeper about decision-making under risk and uncertainty, let’s look at each of these situations such as certainty, risk and uncertainty. Despite all the data crunching and predictive technology, businesses these days have to deal with a lot of uncertainty and the ‘what if’ scenarios.
The recent pandemic outbreak has dramatically altered the business landscape globally. Today, decision-making has become more complicated due to the uncertainty all around us.
Behavioural finance is a concept developed with the inputs taken from the field of psychology and finance. It tries to understand the various puzzling factors in stock markets to offer better explanations for the same.
Behavioural finance is defined as the study of the influence of socio-psychological factors on an asset’s price. It focuses on investor behaviour and their investment decision-making process.
HEURISTICS: (Rule of thumb strategy) Heuristics are referred as rule of thumb, which applies in decision making to reduce the cognitive resources to solve a problem. These are mental shortcuts that simplify the complex methods to make a judgment. Investor as decision maker confronts a set of choices within certainty and limited ability to quantify results. This leads identification and understanding of all heuristics that affect financial decision making. Some of heuristics are representativeness, anchoring & adjustments, familiarity, overconfidence, regret aversion, conservatism, mental accounting, availability, ambiguity aversion and effect. Heuristics help to make decision.
FRAMING: The perceptions of choices that people have are strongly influenced by how these choices are framed. It means choices depend on how question is framed, even though the objective facts remain constant. Psychologists refer this behaviour as a’ frame dependence’. As Glaser, Langer, Reynders and Weber(2007) show that investors forecast of the stock market depends on whether they are given and asked to forecast future prices or future return. So it is how framing has adversely affected people’s choices.
EMOTIONS: Emotions and associated human unconscious needs, fantasies, and fears drive much decision of human beings. How these needs, fantasies, and fears influence financial decision? Behavioural finance recognise the role Keynes’s “animal spirit” plays in explaining investor choices, and thus shaping financial markets (Akerlof and Shiller, 2009). Underlying premises is that our feeling determine psychic reality affect investment judgment.
MARKET IMPACT: Do the Cognitive errors and biases of individuals and groups of people affect market and market prices? Indeed, main attraction of behavioural finance field was that market prices did not appear to be fair. How market anomalies fed an interest in the possibility that they could be explained by psychology? Standard finance argues that investors’ mistakes would not affect market prices because when prices deviate from fundamental value, rational investor would exploit the mispricing for their own profit.
Study of how owners and managers of publicly-traded companies make decisions that affect the values of those companies.
Examines effects of manager’s and investor’s psychological biases on firms corporate finance decisions.
Main psychological traps met are: confirmation bias, hindsight bias, herding behavior conservatism, the role of affects, wishful thinking, opaque framing, representativeness bias and overconfidence.
“Real-world” view- Managers and investors may be irrational (Psychological Biases) (“homo sapiens” view).
Behavioural Corporate Finance: considers managerial irrationality/biases. Focus on corporate finance decisions (investment appraisal, capital structure/dividend policy.
How the personal traits of managers affect the decisions made in the firm, especially financial decisions. We will see that the psychological qualities of individuals holding management positions have a decisive effect on.
For instance, their financing and capital budgeting decisions or their dividend policy. It will also become clear that the psychological profile of each manager will provide an explanation for the financial decisions made beyond the scope of the company and its business sector.
Assumptions of Behavioural Corporate Finance
Assumes irrational entrepreneurs or managers
Postulates irrational investors and limited arbitrage.
The Rational Managers with Irrational Investors Approach
This approach assumes that securities market arbitrage is imperfect, and thus that prices can be too high or too low. Rational managers are assumed to perceive mispricings, and to make decisions that may encourage respond to mispricing.
Rational manager objectives in irrational market:
1. Fundamental value - Maximizing fundamental value has the usual ingredients.
2. Catering - Catering refers to decisions that aim at boosting stock price above the level of intrinsic value.
3. Market timing - Market timing relates to the decision that aims at exploiting temporary mispricing.
Two Key Building Blocks:
1. Limits on arbitrage - Irrational investors impact prices because arbitrage is limited.
2. Smart managers - Managers have the ability to detect when valuations are wrong and they act on mispricing.
Defined Expected utility theory,
Defined Prospect Theory,
Defined Disposition effect
Defined Heuristics and biases
Contact: rehankango@ymail.com +92337548656
Behavioural finance is a concept developed with the inputs taken from the field of psychology and finance. It tries to understand the various puzzling factors in stock markets to offer better explanations for the same.
Behavioural finance is defined as the study of the influence of socio-psychological factors on an asset’s price. It focuses on investor behaviour and their investment decision-making process.
HEURISTICS: (Rule of thumb strategy) Heuristics are referred as rule of thumb, which applies in decision making to reduce the cognitive resources to solve a problem. These are mental shortcuts that simplify the complex methods to make a judgment. Investor as decision maker confronts a set of choices within certainty and limited ability to quantify results. This leads identification and understanding of all heuristics that affect financial decision making. Some of heuristics are representativeness, anchoring & adjustments, familiarity, overconfidence, regret aversion, conservatism, mental accounting, availability, ambiguity aversion and effect. Heuristics help to make decision.
FRAMING: The perceptions of choices that people have are strongly influenced by how these choices are framed. It means choices depend on how question is framed, even though the objective facts remain constant. Psychologists refer this behaviour as a’ frame dependence’. As Glaser, Langer, Reynders and Weber(2007) show that investors forecast of the stock market depends on whether they are given and asked to forecast future prices or future return. So it is how framing has adversely affected people’s choices.
EMOTIONS: Emotions and associated human unconscious needs, fantasies, and fears drive much decision of human beings. How these needs, fantasies, and fears influence financial decision? Behavioural finance recognise the role Keynes’s “animal spirit” plays in explaining investor choices, and thus shaping financial markets (Akerlof and Shiller, 2009). Underlying premises is that our feeling determine psychic reality affect investment judgment.
MARKET IMPACT: Do the Cognitive errors and biases of individuals and groups of people affect market and market prices? Indeed, main attraction of behavioural finance field was that market prices did not appear to be fair. How market anomalies fed an interest in the possibility that they could be explained by psychology? Standard finance argues that investors’ mistakes would not affect market prices because when prices deviate from fundamental value, rational investor would exploit the mispricing for their own profit.
Study of how owners and managers of publicly-traded companies make decisions that affect the values of those companies.
Examines effects of manager’s and investor’s psychological biases on firms corporate finance decisions.
Main psychological traps met are: confirmation bias, hindsight bias, herding behavior conservatism, the role of affects, wishful thinking, opaque framing, representativeness bias and overconfidence.
“Real-world” view- Managers and investors may be irrational (Psychological Biases) (“homo sapiens” view).
Behavioural Corporate Finance: considers managerial irrationality/biases. Focus on corporate finance decisions (investment appraisal, capital structure/dividend policy.
How the personal traits of managers affect the decisions made in the firm, especially financial decisions. We will see that the psychological qualities of individuals holding management positions have a decisive effect on.
For instance, their financing and capital budgeting decisions or their dividend policy. It will also become clear that the psychological profile of each manager will provide an explanation for the financial decisions made beyond the scope of the company and its business sector.
Assumptions of Behavioural Corporate Finance
Assumes irrational entrepreneurs or managers
Postulates irrational investors and limited arbitrage.
The Rational Managers with Irrational Investors Approach
This approach assumes that securities market arbitrage is imperfect, and thus that prices can be too high or too low. Rational managers are assumed to perceive mispricings, and to make decisions that may encourage respond to mispricing.
Rational manager objectives in irrational market:
1. Fundamental value - Maximizing fundamental value has the usual ingredients.
2. Catering - Catering refers to decisions that aim at boosting stock price above the level of intrinsic value.
3. Market timing - Market timing relates to the decision that aims at exploiting temporary mispricing.
Two Key Building Blocks:
1. Limits on arbitrage - Irrational investors impact prices because arbitrage is limited.
2. Smart managers - Managers have the ability to detect when valuations are wrong and they act on mispricing.
Defined Expected utility theory,
Defined Prospect Theory,
Defined Disposition effect
Defined Heuristics and biases
Contact: rehankango@ymail.com +92337548656
The Chapter consists of evolutionary aspects of behavioural finance. Discussed Hyperbolic discounting, familiarity bias, heuristics, self-deception, overconfidence, success equation, and EMH. Further, the chapter discussed the emotion and theories of emotions, dimensions of emotions, and social influence on investment and consumption. In psychology, a heuristic is an easy-to-compute procedure or "rule of thumb" that people use when forming beliefs, judgments or decisions. The familiarity heuristic was developed based on the discovery of the availability heuristic by psychologists Amos Tversky and Daniel Kahneman; it happens when the familiar is favored over novel places, people, or things.
The familiarity heuristic can be applied to various situations that individuals experience in day-to-day life. When these situations appear similar to previous situations, especially if the individuals are experiencing a high cognitive load, they may regress to the state of mind in which they have felt or behaved before. The familiarity heuristic stems from the availability heuristic, which was studied by Tversky and Kahneman. The availability heuristic suggests that the likelihood of events is estimated based on how many examples of such events come to mind. Thus the familiarity heuristic shows how "bias of availability is related to the ease of recall.
Individuals automatically assume that their previous behaviour will yield the same results when a similar situation arises. Emotion is a complex, subjective experience accompanied by biological and behavioral changes. Emotion involves feeling, thinking, activation of the nervous system, physiological changes, and behavioural changes such as facial expressions.
In psychology, emotion is often defined as a complex state of feeling that results in physical and psychological changes that influence thought and behavior. Emotionality is associated with a range of psychological phenomena, including temperament, personality, mood, and motivation.
According to author David G. Myers, human emotion involves “ physiological arousal, expressive behaviours, and conscious experience."
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.
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
Subscribe to Vision Academy for Video assistance
https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
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.
This is a Behavioral Finance Lesson material which delivered by me for PhD students of Faculty of Business Administration in Karvina, Silesian University.
An investor is a person who allocates capital with the expectation of a future financial return. Types of investment include : equity , debt securities , real estates, currency , and commodity , derivatives such as put and call options, etc,
rganizational behavior (OB) is a field of study that focuses on understanding, explaining, and improving the behavior of individuals and groups within organizations. It is concerned with how people behave in work settings, how organizations affect their behavior, and how individuals and groups interact with each other and with the larger organizational context.
Organizational behavior draws from a variety of disciplines, including psychology, sociology, anthropology, and economics. It encompasses topics such as motivation, leadership, communication, group dynamics, decision-making, organizational culture, and organizational change.
The goal of organizational behavior research is to develop a better understanding of why people behave the way they do in work settings and to identify ways to improve organizational performance and employee well-being. This knowledge can be applied in a variety of settings, including businesses, government agencies, and non-profit organizations.
The Chapter consists of evolutionary aspects of behavioural finance. Discussed Hyperbolic discounting, familiarity bias, heuristics, self-deception, overconfidence, success equation, and EMH. Further, the chapter discussed the emotion and theories of emotions, dimensions of emotions, and social influence on investment and consumption. In psychology, a heuristic is an easy-to-compute procedure or "rule of thumb" that people use when forming beliefs, judgments or decisions. The familiarity heuristic was developed based on the discovery of the availability heuristic by psychologists Amos Tversky and Daniel Kahneman; it happens when the familiar is favored over novel places, people, or things.
The familiarity heuristic can be applied to various situations that individuals experience in day-to-day life. When these situations appear similar to previous situations, especially if the individuals are experiencing a high cognitive load, they may regress to the state of mind in which they have felt or behaved before. The familiarity heuristic stems from the availability heuristic, which was studied by Tversky and Kahneman. The availability heuristic suggests that the likelihood of events is estimated based on how many examples of such events come to mind. Thus the familiarity heuristic shows how "bias of availability is related to the ease of recall.
Individuals automatically assume that their previous behaviour will yield the same results when a similar situation arises. Emotion is a complex, subjective experience accompanied by biological and behavioral changes. Emotion involves feeling, thinking, activation of the nervous system, physiological changes, and behavioural changes such as facial expressions.
In psychology, emotion is often defined as a complex state of feeling that results in physical and psychological changes that influence thought and behavior. Emotionality is associated with a range of psychological phenomena, including temperament, personality, mood, and motivation.
According to author David G. Myers, human emotion involves “ physiological arousal, expressive behaviours, and conscious experience."
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.
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
Subscribe to Vision Academy for Video assistance
https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
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.
This is a Behavioral Finance Lesson material which delivered by me for PhD students of Faculty of Business Administration in Karvina, Silesian University.
An investor is a person who allocates capital with the expectation of a future financial return. Types of investment include : equity , debt securities , real estates, currency , and commodity , derivatives such as put and call options, etc,
rganizational behavior (OB) is a field of study that focuses on understanding, explaining, and improving the behavior of individuals and groups within organizations. It is concerned with how people behave in work settings, how organizations affect their behavior, and how individuals and groups interact with each other and with the larger organizational context.
Organizational behavior draws from a variety of disciplines, including psychology, sociology, anthropology, and economics. It encompasses topics such as motivation, leadership, communication, group dynamics, decision-making, organizational culture, and organizational change.
The goal of organizational behavior research is to develop a better understanding of why people behave the way they do in work settings and to identify ways to improve organizational performance and employee well-being. This knowledge can be applied in a variety of settings, including businesses, government agencies, and non-profit organizations.
The chapter consists of Tax Deducted at Source and Collection of Tax at source.
Tax Deducted at Source (TDS) is one of the ways to collect tax based on certain percentages on the amount payable by the receiver on goods/services. The collected tax is a revenue for the government.
Who is liable to deduct TDS under GST law?
A. A department or an establishment of the Central Government or State Government; or
B. Local authority; or
C. Governmental agencies; or
D. Such persons or category of persons as may be notified by the Government.
As per the latest Notification dated 13th September 2018, the following entities also need to deduct TDS-
An authority or a board or any other body which has been set up by Parliament or a State Legislature or by a government, with 51% equity ( control) owned by the government.
A society established by the Central or any State Government or a Local Authority and the society is registered under the Societies Registration Act, 1860.
Public sector undertakings.
What is TCS under GST
Tax Collected at Source (TCS) under GST means the tax collected by an e-commerce operator from the consideration received by it on behalf of the supplier of goods, or services who makes supplies through the operator’s online platform. TCS will be charged as a percentage on the net taxable supplies. The provision of TCS under GST is dealt under Section 52 of the CGST Act.
Who is liable to collect TCS under GST
Certain operators who own, operate and manage e-commerce platforms are liable to collect TCS. TCS applies only if the operators collect the consideration from the customers on behalf of vendors or suppliers. In other words, when the e-commerce operators pay the consideration collected to the vendors they have to deduct an amount as TCS and pay the net amount.
Here are few exceptions to the TCS provisions for the services provided by an e-commerce platform:
Hotel accommodation/clubs (unregistered suppliers)
Transportation of passengers – radio taxi, motor cab or motorcycle
Housekeeping services like plumbing, carpentry etc. (unregistered suppliers)
For example – M/s.XYZ stores (a proprietorship) is selling garments through Flipkart. Flipkart, being an e-commerce operator, before it makes the payment of consideration collected on behalf of XYZ, will be liable to deduct TCS.
What is the rate applicable under TCS
The dealers or traders supplying goods and/or services through e-commerce operators will receive payment after deduction of TCS @ 1%. The rate is notified by the CBIC in Notification no. 52/2018 under CGST Act and 02/2018 under IGST Act.
This means for an intra-state supply TCS at 1% will be collected, i.e 0.5 % under CGST and 0.5% under SGST. Similarly, for a transaction between the states, the TCS rate will be 1%, i.e under the IGST Act.
The chapter consists of Computation of Tax Liability and Payment of Tax; Interest on Delayed Payment of Tax; Refund of Tax; Tax Deduction at Source (TDS); Collection of Tax at Source (TCS); Computation of Interest on Delayed Payment of Tax. Composition scheme, eligible tax payers, turn over limit in case of composition scheme. Eligibility for composition scheme, person not eligible to opt composition scheme, conditions for availing composition scheme, advantages and disadvantages of composition scheme, computation of tax liability, Interest on delayed payment of tax,
Refund of Tax: Usually when the GST paid is more than the GST liability a situation of claiming GST refund arises. Under GST the process of claiming a refund is standardized to avoid confusion. The process is online and time limits have also been set for the same.
When can the refund be claimed?
There are many cases where refund can be claimed. Here are some of them – Excess payment of tax is made due to mistake or omission.
Dealer Exports (including deemed export) goods/services under claim of rebate or Refund
ITC accumulation due to output being tax exempt or nil-rated
Refund of tax paid on purchases made by Embassies or UN bodies
Tax Refund for International Tourists
Finalization of provisional assessment
How to calculate GST refund?
Let’s take a simple case of excess tax payment made. Mr. B’s GST liability for the month of September is Rs 50000. But due to mistake, Mr. B made a GST payment of Rs 5 lakh. Now Mr. B has made an excess GST payment of Rs 4.5 lakh which can be claimed as a refund by him. The time limit for claiming the refund is 2 years from the date of payment.
The chapter consists of basics of Goods and Service Tax, Tax Invoice; Credit and Debit Notes; E-Way Bill, Procedure for Generation of E-Way Bill; Accounts and Records; Electronic Cash Ledger, Manner of Utilization of Amount in Electronic Cash Ledger, Electronic Credit Ledger-Manner of Utilization of ITC, Electronic Liability Ledger-Order of Discharge of Tax and Other Dues.
An invoice is a commercial instrument issued by a supplier of goods/services to a recipient.
In GST, all invoices issued between the date of implementation of GST and the date of issuance of GST registration certificate will have to be reissued in the form of a revised invoice and have to be raised within a month of issuance of the registration certificate.
A supplementary tax invoice is an invoice that a taxable person issues if any deficiency is found in a tax invoice already issued by the said taxable person. A supplementary invoice is also known as a debit note.
The recipient who is registered under GST has to issue a payment voucher for the transactions(goods or services) on which reverse charge is applicable to the supplier. For example Ajay cashew house registered in Delhi had purchased cashew nuts from Vikram an agriculturist for Rs 100000 in Karnataka.
Rule 55 specifies the cases where at the time of removal of goods, goods may be removed on delivery challan and invoice may be issued after delivery. Issuance of Credit Note – Section 34(1)
Issuance of Debit Note – Section 34(3)
Details of Credit Note to be furnished in return – Section 34(2)
Details of Debit Note to be furnished in return – Section 34(4)
EWay Bill is an Electronic Way bill for movement of goods to be generated on the eWay Bill Portal. A GST registered person cannot transport goods in a vehicle whose value exceeds Rs. 50,000 (Single Invoice/bill/delivery challan) without an e-way bill that is generated on ewaybillgst.gov.in.
Registered Person – E-way bill must be generated when there is a movement of goods of more than Rs 50,000 in value to or from a registered person. A Registered person or the transporter may choose to generate and carry eway bill even if the value of goods is less than Rs 50,000.
e-Cash ledger indicates the amount that has been paid by the taxpayer to the government. The amount in this ledger can be used to make payment of tax, interest, liability, fees and so forth.
e-Credit ledger or electronic credit ledger is maintained in the form GST PMT-02 on the GST Portal.
This ledger helps in tracking all the Input Tax Credit (ITC) claims made by the taxpayer. However, it shall be noted that any remaining amount in the e-Credit ledger can be used in making the payment of output tax liability only. E-Liability Register will reflect the total tax liability of a taxpayer for a particular tax period.
Debit to Electronic Credit Ledger and Credit to Electronic Liability Register
Unit 5 CSM: Strategic Evaluation and ComtrolDayanand Huded
The chapter comprises of Overview of Strategic Evaluation; Strategic Control; Techniques of Strategic Evaluation and Control. Evaluation of Strategic Alternatives - Product Portfolio Models, BCG Matrix, GE Matrix, Gap Analysis; Strategic Control System.
Strategic evaluation and control is the final phase in the process of strategic management. Its basic purpose is to ensure that the strategy is achieving the goals and objectives set for the strategy. It compares performance with the desired results and provides the feedback necessary for management to take corrective action.
According to Fred R. David, strategy evaluation includes three basic activities
(1) examining the underlying bases of a firm’s strategy,
(2) comparing expected results with actual results, and
(3) taking corrective action to ensure that performance conforms to plans. Sometime, the best formulated strategies become obsolete (outdated) as a firm’s external and internal environments change.
Strategic control is a type of “steering control”. We have to track the strategy as it is being implemented, detect any problems or changes in the predictions made, and make necessary adjustments. This is especially important because the implementation process itself takes a long time before we can achieve the results.
Strategic control is like an alarm long before the calamity can happen.
Operational control is the process of ensuring that specific tasks are carried out effectively and efficiently. The operational control aims at evaluating the performance of the organization. Most of the control system in organization are operational in nature. Some examples of operational control are : Budgetary control, Quality control, Inventory control, Production Control, Cost control etc.
Portfolio Model is a technique used to analyse organisations in relation to their environments
Portfolio (set, collection, assortment, range, group)
A business Portfolio may be any collection of brands/products, markets, branches /divisions, income generating assets, etc.
PA is usually applied to firms with multiple SBUs (more than one product/services, customer categories, markets , divisions)
Helps managers in taking decisions regarding which SBUs to allocate more or less resources to at a given strategic point in time
After portfolio analysis firm makes an informed strategic choice e.g.
To have a balanced portfolio (minimize risk and maximize return) of all portfolios
To actively deploy a retrenchment strategy
Unit V AMM Green Marketing, CRM & Rural MarketingDayanand Huded
The Presentation comprises of Green marketing, Customer relationship management and rural marketing.
Green marketing is the marketing of products that are presumed to be environmentally safe. It incorporates a broad range of activities, including product modification, changes to the production process, sustainable packaging, as well as modifying advertising.
The term ‘green’ is indicative of purity. Green means pure in quality and fair or just in dealing. For example, green advertising means advertising without adverse impact on society. Green message means matured and neutral facts, free from exaggeration or ambiguity.
CRM: Customer Relationship Management is a comprehensive approach for creating, maintaining and expanding customer relationships.
CRM “is a business strategy that aims to understand, anticipate and manage the needs of an organisation’s current and potential customers”
It is a “comprehensive approach which provides seamless integration of every area of business that touches the customer- namely marketing, sales, customer services and field support through the integration of people, process and technology”
CRM is a shift from traditional marketing as it focuses on the retention of customers in addition to the acquisition of new customers
“The expression Customer Relationship Management (CRM) is becoming standard terminology, replacing what is widely perceived to be a misleadingly narrow term, relationship marketing (RM)”
CRM (Customer Relationship Management) is a comprehensive strategy and process of acquiring, retaining and partnering with selective customers to create superior value for the company and the customer.
The basic objective of CRM is to increase marketing efficiency and effectiveness.
Rural Marketing:
Rural marketing is a practise of assessing, persuading and converting the needs, wants, purchasing power of the customers into effective demand for products and service out for sale which would help in sufficing the requirements of people in the rural areas and thus increase the satisfaction levels as well as standard of living.
There are 600,000 villages in India. 25% of all villages account for 65% of the total rural population. So we can contact 65% of 680 million or 700 million population by simply contacting 150000 villages – which shows the huge potential of this market.
Rural marketing involves the process of developing, pricing, promoting, distributing rural specific product and a service leading to exchange between rural and urban market which satisfies consumer demand and also achieves organizational objectives.
The chapter comprises of Service Marketing, E-Marketing, Green Marketing, Customer Relationship Management, Rural Marketing; Other Emerging Trends- Ethical Issues in Marketing.
Service is an act or performance that one party can offer to another that is essentially intangible and does not result in any ownership of anything. Its production may or may not be tied to physical products.(Philip Kotler)
It is based on relationship and value.
It may be used to market a service or product.
What is Service Marketing?
The American Marketing Association defines services marketing as “an organizational function and a set of processes for identifying or creating, communicating, and delivering value to customers and for managing customer relationship in a way that benefit the organization and stake-holders”.
Service marketing is involved in designing, delivering, and doing post-delivery analysis of services for optimizing reach, measuring customer satisfaction, and standing-out from identical services offered by other market players.
Intangibility: A service is not a physical product that you can touch or see. A service can be experienced by the buyer or the receiver. Also, you can not judge the quality of the service before consumption.
Heterogeneous: There can be no perfect standardization of services. Even if the service provider remains the same, the quality of the service may differ from time to time.
Inseparability: One unique characteristic of services is that the service and the service provider cannot be separated. Unlike with goods/products the manufacturing and the consumption of services cannot be separated by storage.
No Stock Maintenance: The production and consumption of services are not inseparable because storage of services is not possible. Being an intangible transaction there can never be an inventory of services.
The potential customers form an impression about the service on the basis of service environment. The service environment represents the physical back drop that surrounds the service.
For example, providing hygienic food is the core service in a hotel or restaurant. Customers expect the restaurants to be maintained clean, offer flexible dining hours prompt service, soft music, décor, exotic menu etc.
Advantages of Service Marketing: 1, Repeat business
When you build a plan of service to reach your customers, you can expect a reward of repeat business from them. The goal of effectively marketing your brand is to capture the attention of your target market.
2. referrals
The next best thing to having your clients come back is to have them tell others about their experience and recommend your products or services to them. You must consider that if your customers have a bad experience, it is likely they will tell 10 people about that negative experiences also.
3. publicity
Other benefits from your good service are through publicity. As the buzz flows about your outstanding service, from following through on what you’ve promised.
The chapter comprises of Meaning and Characteristics, Importance, Factors Influencing Consumer Behaviour, Consumer Purchase Decision Process, Buying Roles, Buying Motives, Buyer Behaviour Models.
Consumer behaviour is the study of how individual customers, groups or organizations select, buy, use, and dispose ideas, goods, and services to satisfy their needs and wants.
It refers to the. actions of the consumers in the marketplace and the underlying motives for those actions.
Consumer behaviour is the study of how people make decisions about what they buy, want, need, or act in regards to a product, service or company.
It is a study of the actions of the consumers that drive them to buy and use certain products. Understanding consumer buying behavior is most important for marketers as it helps them to relate better to the expectation of the consumers.
a) Consumer behavior is the part of human behavior: This cannot be separated. Human behavior decides what to buy, when to buy etc. This is unpredictable in nature. Based on the past behavioral pattern one can at least estimate like the past he might behave.
b) Learning the consumer is difficult and complex as it involves the study of hum beings: Each Individual behaves differently when he is placed at different situations. Every day is a lesson from each and every individual while we learn the consumer behavior. Today one may purchase a product because of its smell, tomorrow it may vary and he will purchase another due to some another reason.
c) Consumer behavior is dynamic: A consumer's behavior is always changing in nature: The taste and preference of the people vary. According to that consumers behave differently. As the modern world changes the consumer's behaving pattern also changes.
d) Consumer behavior is influenced by psychological, social and physical factors: A consumer may be loyal with a product due to its status values. Another may stick with a product due to its economy in price. Understanding these factors by a marketer is crucial before placing the product to the consumers.
1. To design production policies: This is the first importance of consumer behaviour and it means that all the production policies have designed taking into consideration the consumer preference so that product can be successful in the market.
2. Know the effect of price on buying: This is the second consumer behaviour importance and it means that consumer behavior can help in understanding the effect of price on buying. Whenever the price is moderate on cheap more and more customer will buy the product.
After the time of production, there comes a time in which the company has to decide what the price of our product will be because it helps to divide the categories of the customer and also helps to attain more sales.
3. Exploit the market opportunities: This is the third importance or significance of consumer behaviour and it means that the change in consumer preference can be a good opportunity for the marketing
The chapter comprises of Meaning, Environment, Raising of Finance in International Markets, Euro Issues, GDRs and ADRs Guidelines for Raising Funds in International Markets through various Instruments; Working of International Stock Exchanges with respect to their Size - Listing Requirements, Membership, Clearing and Settlement of New York Stock Exchange, NASDAQ, London Stock Exchange, Tokyo Stock Exchange, Luxembourg Stock Exchange, German and France Stock Exchanges.
The international stock market refers to all the international markets that negotiate stocks from their domestic companies. For example, you can buy stocks from Apple at the local American market, but to get stocks from the Japanese Sapporo, you need to go the international (Japanese) market. Most countries have their own stock exchange.
Part of the financial system concerned with raising long-term capital through shares, bonds, and other long-term investments.
EURO ISSUE:
The term `euro' denotes that the issue is listed on a European Stock Exchange.
A euro issue is a issue where the securities are issued in a currency different from the currency of the country of issue and the securities are sold in international market to individual and institutional investors.
Euro securities are negotiable and transferable securities distributed by a syndicate of market intermediaries and underwriters, By an euro issue, a company is able to raise funds at a cheaper rate, Euro bond is an international bond issued to investors from throughout the world.
A global depositary receipt (GDR) is a certificate issued by a bank that represents shares in a foreign stock on two or more global markets. GDRs typically trade on American stock exchanges as well as Eurozone or Asian exchanges.
GDRs represent ownership of an underlying number of shares of a foreign company and are commonly used to invest in companies from developing or emerging markets by investors in developed markets.
Prices of global depositary receipt are based on the values of related shares, but they are traded and settled independently of the underlying share.
ADR's are depository receipts issued in United States of America (USA) in accordance with the provisions of Securities and Exchange Commission.
American Depository Receipts (ADRs) offer US investors a means to gain investment exposure to non-US stocks without the complexities of dealing in foreign stock markets.
It refers to a negotiable certificate issued by a U.S. depositary bank representing a specified number of shares usually one share of a foreign company's stock.
The ADR trades on U.S. stock markets as any domestic shares would. ADRs offer U.S. investors a way to purchase stock in overseas companies that would not otherwise be available.
It is denominated in US $
INFOSYS Technologies was the First Indian Company to issue ADR.
The chapter comprises of The Depositories Act, 1996; SEBI Depositories and Participants Regulations 1996 and 2012; Types of Depositories - NSDL, CDSL and Depository Participant; Dematerialization - International Securities Identification Number (ISIN) - Procedure for Dematerialization and Rematerialization; Settlement of Off- Market Transactions: Insider Trading - Legal Framework for Investor Protection in India; Internet Initiatives at Depository services; Credit Rating- Meaning and Necessity, Methodology of Credit Rating, Credit Rating Agencies in India.
What is Depository?
An organization where the securities of an investor are held in electronic form at the request of the investor and which carries out the securities transactions by book entry through the medium of a depository participant.
What is a Depository System?
A system whereby transfer of securities takes place by means of book entry on the ledgers of the Depository without physical movement of scripts.
Problems Resulted in Formation of Depository
Before introduction of Depository system, the problems faced by investors and corporates in handling large volume of paper were as follows:
1)Bad deliveries, 2) Fake certificates, 3) Loss of certificates in transit
4) Mutilation of certificates, 5) Delays in transfer Long settlement cycles, 6), Mismatch of signatures, 7) Delay in refund and remission of dividend etc.
Code of Conduct for Participants
1. A participant shall make all efforts to protect the interests of investors.
2. A participant shall always endeavour to—
(a) render the best possible advice to the clients having regard to the clients needs and the environments and his own professional skills;
grievances of investors are redressed without any delay
3. A participant shall maintain high standards of integrity in all its dealings with its clients and other intermediaries, in the conduct of its business.
4. A participant shall be prompt and diligent in opening of a beneficial owner account, dispatch of the dematerialisation request form, rematerialisation request form and execution of debit instruction slip and in all the other activities undertaken by him on behalf of the beneficial owners.
5. A participant shall endeavour to resolve all the complaints against it or in respect of the activities carried out by it as quickly as possible, and not later than one month of receipt.
6. A participant shall not increase charges/fees for the services rendered without proper advance notice to the beneficial owners.
7. A participant shall not indulge in any unfair competition, which is likely to harm the interests of other participants or investors or is likely to place such other participants in a disadvantageous position while competing for or executing any assignment.
8. A participant shall not make any exaggerated statement whether oral or written to the clients either about its qualifications or capability to render certain services or about its achievements in regard to SE.
The chapter comprises of Importance and Functions, Listing of Securities in Stock Exchanges; Players in Stock Exchange - Investors, Speculators, Market Makers, Stock Brokers; Eligibility Criteria; Trading in Stock Exchange, Stock Exchanges - Bombay Stock Exchange, National Stock Exchange, Over-the-Counter Exchange of India; The SEBI Trading Mechanism - BOLT, NEAT System and Screen Based System.
Listing refers to the admission of the securities of a company on a recognised stock exchange for trading. Listing of securities is undertaken with the primary objective of providing marketability, liquidity and transferability of shares.
To be submitted along with the application for listing:-
1. Memorandum of Associations, Articles of Association, Prospectus, Directors’ report, Annual Accounts, Agreement with Underwriters, etc.
2. Company’s activities, capital structure, distribution of shares, dividends and bonus shares issued, etc.
Listing Requirements:
For this purpose companies have been classified into 2 groups:-
1. Large Cap Companies (minimum issue size of Rs.10 crores and market capitalization of not less than Rs.25 crores)
2. Small Cap Companies (minimum issue size of Rs.3 crores and market capitalization of not less than Rs.5 crores)
Trading in Stock Exchange
The system of trading in stock exchanges for many years was known as floor trading.
In the new electronic stock exchanges which have fully automated computerized mode of trading, floor trading is replaced with a new system of trading known as screen-based trading.
Screen-based trading are two types
1. Quote driven system 2. Order driven system
Under the quote driven system the market- maker, who is a dealer in particular security, input two way quotes into the system that is bid price and offer price .
Under the order driven system clients place their buy and sell orders with the brokers.
Types of Orders
An investor may place two type of orders
1. Market order-In market order the broker is instructed by the investor to buy or sell a stated number of share immediately at the best price in the market.
2. Limit order- It is an order for the purchase or sale of securities at a fixed price specified by the client. “ buy at Rs. 50 or less” “ sell at Rs. 60 or more” No guarantee that limit order will be executed
National Stock Exchange
Established in 1992
Girish Chandra Chaturvedi, Chairperson
Ashishkumar Chauhan, MD and CEO
NSE is ranked 4th in the world in cash equities by number of trades as per the statistics maintained by the World Federation of Exchanges (WFE) for the calendar year 2021
First dematerialized electronic exchange in the country.
Number of Lists 2002 (As of October 2021)
The exchange was incorporated in 1992 as a tax-paying company and was recognized as a stock exchange in 1993 under the Securities Contracts (Regulation) Act, 1956, when P. V. Narasimha Rao was the Prime Minister of India and Manmohan Singh was the Finance Minister.
The chapter comprises of Primary Market - Its Role and Functions; Issue of Capital - Methods of Issuing Securities in Primary Market, Intermediaries in New Issue Market - Merchant Bankers, Underwriters, Brokers, Registrars and Managers Bankers; Pricing of Issue - Book Building, Green Shoe Option, Procedure for New Issues and SEBI Guidelines for Issue in Primary Market.
The primary market is where securities are created. It's in this market that firms sell (float) new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary market.
These trades provide an opportunity for investors to buy securities from the bank that did the initial underwriting for a particular stock.
An IPO occurs when a private company issues stock to the public for the first time.
Companies and government entities sell new issues of common and preferred stock, corporate bonds and government bonds, notes, and bills on the primary market to fund business improvements or expand operations. Although an investment bank may set the securities' initial price and receive a fee for facilitating sales, most of the funding goes to the issuer. Investors typically pay less for securities on the primary market than on the secondary market.
A rights offering (issue) permits companies to raise additional equity through the primary market after already having securities enter the secondary market. Current investors are offered prorated rights based on the shares they currently own, and others can invest anew in newly minted shares.
Companies can raise capital at relatively low cost, and the securities so issued in the primary market provide high liquidity as the same can be sold in the secondary market almost immediately.
The primary market is an important source for mobilisation of savings in an economy. Funds are mobilised from commoners for investing in other channels. It leads to monetary resources being put into investment options.
Chances of price manipulation in the primary market are considerably less when compared to the secondary market. Such manipulation usually occurs by deflating or inflating a security price, thereby deliberately interfering with fair and free operations of the market.
The primary market acts as a potential avenue for diversification to cut down on risk. It enables an investor to allocate his/her investment across different categories involving multiple financial instruments and industries.
It is not subject to any market fluctuations. The prices of stocks are determined before an initial public offering, and investors know the actual amount they will have to invest.
Unit II Tax Planning and Company PromotionDayanand Huded
The chapter comprises of Meaning of Tax Planning, Tax Avoidance, Tax Evasion and Tax Management; Features and Scope for Tax Planning; Business Location and Tax Planning; Nature of Business and Tax Planning: FTZ, Units in SEZ, 100% EOU and Infrastructure Development.
Tax planning is a focal part of financial planning. It ensures savings on taxes while simultaneously conforming to the legal obligations and requirements of the Income Tax Act, 1961. The primary concept of tax planning is to save money and mitigate one's tax burden.
Tax Planning is the arrangement of financial activities in such a way that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws. It entitles the assessee to avail certain exemptions, deductions, rebates and reliefs, so as to minimise its tax liability.
(i) Reduction of tax liability: One of the supreme objectives of tax planning is the reduction of the tax liability of the payer and the resultant saving of the earnings for a better enjoyment of the fruits of hard labour.
(ii) Minimization of litigation and the tax payer may be saved from the hardships and inconveniences caused by unnecessary litigations.
(iii) Productive investment: Tax planning is a measure of awareness of the taxpayer to the intricacies of the taxation laws and it is the economic consciousness of the income earner to find out the ways and means of productive investment of the earnings which would go a long way to minimize its tax burden.
(iv) Healthy growth of economy: The saving of earnings is the only basement upon which the economic structure of human life is founded.
(v) Economic stability: Productive investment increase contours of the national economy embracing in itself the economic prosperity of not only the tax payers but also of those who earn the income not chargeable to tax. The planning thus creates economic stability of the nation and its people by even distribution of economic resources.
(i) Residential status and citizenship of the assessee: We know that a non-resident in India is not liable to pay income-tax on incomes which accrue or arise and are also received outside India, whereas a resident in India is liable to pay income-tax on such incomes.
(ii) Heads of income/assets to be included in computing net wealth: Before the Tax-planner goes in for his task; he has to have a full picture of the sources of Income of the tax payer and the members of his family
This chapter consists of E-commerce Transaction and Liability in Special Cases; Tonnage Taxation, TDS; Advance Payment of Tax with reference to Corporate Assessee; TCS; Administrative Procedure; Assessment- Procedures and Types of Assessment; Return on Income; Statement of Financial Transaction (SFT). E-Filing: Appeal and Revision; Penalties.
Electronic contracts are governed by the basic principles elucidated in the Indian Contract Act, 1872, which mandates that a valid contract should have been entered with a free consent and for a lawful consideration between two adults.
Investments in the E-Commerce Space in India Foreign direct investment (“FDI”) in India is regulated under the Foreign Exchange Management Act 1999 (“FEMA”). The Department of Industrial Policy and Promotion (“DIPP”), Ministry of Commerce and Industry, Government of India makes policy pronouncements on FDI through Press Notes and Press Releases which are notified by the Reserve Bank of India (“RBI”) as amendments to Foreign Exchange Management Regulations, 2000
Tonnage Tax is a way for qualifying shipping companies to calculate their shipping related profits for Corporation Tax (CT) purposes. The shipping related profits are calculated based on the tonnage of the ships used in the company's shipping trade.
A tonnage tax is a taxation mechanism that can be applied to shipping companies instead of ordinary corporate taxation. The tax is determined by the net tonnage of the entire fleet of vessels under operation or use by a company. It is on the basis of this variable that taxation is applied.
Tonnage Tax is a way for qualifying shipping companies to calculate their shipping related profits for Corporation Tax (CT) purposes. The shipping related profits are calculated based on the tonnage of the ships used in the company’s shipping trade.
The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate issued by the deductor.
Tax Planning with Reference to Managerial Decisions_NC.pdfDayanand Huded
This chapter comprises of Financial Decisions: Capital Structure Decisions; Dividend Policy; Bonus Shares and Capital Gains; Bond Washing Transactions; Own or Lease of an Asset, Installment or Hire Purchase, Make or Buy Decisions, Buying an Asset with Own Fund or Borrowed Fund and Repair, Replace, Renewal or Renovation; Shutdown or Continue: Tax Planning in respect of Amalgamation or De-Merger of Companies, Conversion of a Firm into a Company; Conversion of Sole Proprietorship into Company, Conversion of Company into Limited Liability Partnership.
Cost of Capital and also expenditure incurred in raising of such capital. Expectation of shareholders by way of dividend, growth etc. Expansion need of the business i.e. the rate by which profits of the business shall be again ploughed back in the business.
If the return on investment > rate of interest , maximum debt funds may be used, since is shall increase the rate of return on equity . However, cost of raising debt fund should be kept in mind.
if rate of return on investment < rate of interest, minimum debt funds should be used.
Where assessee enjoys tax holidays under various provisions of Income-Tax in such case minimum debt fund should be used, since the profit arising from business is fully exempt from tax which increase the rate of return of equity capital. But the borrowed funds reduces the profits ( profits less interest) before tax and to the extent exemption is reduce.
bond washing transaction can be defined as a transaction where some securities are sold sometime before the due date of Interest and reacquired after the due date is over. In order to discourage such transactions section 94 was introduced.
Where the owner of any securities (in this sub- section and in subsection (2) referred to as" the owner") sells or transfers those securities, and buys back or reacquires the securities, then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise.
Bond washing is the practice of selling a bond just before it pays a coupon payment and then buying it back once the coupon has been paid. Bond washing previously could result in apparently tax-free capital gains because after the coupon has been paid, the bond will often sell for less. However, the practice has been banned in most major jurisdictions.
The Chapter comprises of Carry Forward and Set Off of Losses in the case of Companies, Computation of Taxable Income of Companies; Computation of Corporate Tax Liability; Minimum Alternate Tax; and Tax on Distributed Profits of Domestic Companies. Surcharge, Minimum Alternate Tax, Problems on MAT.
The Finance Act, 2022 has inserted a new section 79A to the Income-tax Act to restrict set off of losses consequent to search, requisition and survey. It has been provided that in case the total income of any previous year of an assessee includes any undisclosed income detected as a result of:
(a) Search initiated under section 132; or
(b) A requisition made under section 132A; or
(c) A survey conducted under section 133A other than under section 133A(2A).
Then, no set-off of any loss, whether brought forward or otherwise, or unabsorbed depreciation, shall be allowed against such undisclosed income while computing the total income of the assessee for such previous year.
The total income of accompany is also computed in the manner in which income of any assessee is computed. A company is assessed in its own name; i.e. a company pays tax on its income as a distinct unit. A tax paid by a company is not deemed to have been paid on behalf of its shareholders. It is determined as follows:
1. First ascertain income under the different heads of income.
2. Income of other persons may be included in the income of the company under sections 60 and 61( para 206 and 207)
3. Current and brought forward losses should be adjusted according to the provisions of sections 70 to 80 (as per para 226 to 233).Para 335 of section 79 provides all the provisions regarding set off and carry forward of losses of closely held companies.
4. The total income so derived under computation of different heads of income is “Gross Total Income”.
5. Following deductions are allowed from the Gross total income so computed, under section 80C to 80 U
The chapter consists of organizational structure of financial system, Components of financial system, Functions of securities of market, securities market and economic growth, profile of Indian securities market, structure of stock exchange, OTCEI, SEBI Act-1992, Role of SEBI in capital market, powers and functions of SEBI, Securities contract regulation act 1956, Reforms to promote investor confidence, and Role of International Organisation of Securities COmmissions.
Substance of Emotion, Theories of Emotion, Types and Dimensions of Emotions, Emotional Styles; Fairness, Reciprocity and Trust; Conformity; Bayesian Decision Making, Heuristics and Cognitive Biases; Neuro Finance and Trader’s Brain.
The concept of emotion may seem simple, but scientists often have trouble agreeing on what it really means. Most scientists believe that emotions involve things other than just feelings
The way that someone experiences an emotion. A feeling is something that you experience internally, in your own mind, and that other people can understand based on your behavior. You can help other people understand how you feel using emotion terms, like “anger” or “sadness”—the subject of this study—or by using analogies, like “I feel the way a kid would feel if her dad took away her Halloween candy.”
They involve bodily reactions, like when your heart races because you feel excited. They also involve expressive movements, including facial expressions and sounds—for example, when you say “woah” because you are fascinated by something. And emotions involve behaviors, like yelling at someone when you are angry.
People use many different words to describe the emotions that they feel.
The patterns of emotion that we found corresponded to 25 different categories of emotion: admiration, adoration, appreciation of beauty, amusement, anger, anxiety, awe, awkwardness, boredom, calmness, confusion, craving, disgust, empathic pain, entrancement, excitement, fear, horror, interest, joy, nostalgia, relief, sadness, satisfaction, and surprise.
According to the Cannon-Bard theory of emotion, we feel emotions and experience physiological reactions such as sweating, trembling, and muscle tension simultaneously.
Another well-known physiological theory is the Cannon-Bard theory of emotion. Walter Cannon disagreed with the James-Lange theory of emotion on several different grounds. First, he suggested, people can experience physiological reactions linked to emotions without actually feeling those emotions. For example, your heart might race because you have been exercising, not because you are afraid.
Cannon also suggested that emotional responses occur much too quickly to be simply products of physical states. When you encounter a danger in the environment, you will often feel afraid before you start to experience the physical symptoms associated with fear, such as shaking hands, rapid breathing, and a racing heart.
Cannon and Bard’s theory suggests that the physical and psychological experience of emotion happens at the same time and that one does not cause the other.
Quantitative management is not a modern business idea but a management theory that came into existence after World War II. Business owners initially used it in Japan to pick up the pieces of the devastation caused by the war and started taking baby steps toward reconstruction. It focuses on the following elements of business operations:
Customer satisfaction
Business value enhancement
Empowerment of employees
Creating synergy among teams
Creating quality products
Preventing defects
Being responsible for quality
Focusing on continuous improvement
Leveraging statistical measurement
Remaining focused on the processes
Commitment to refinement and learning
Quantitative techniques in management as a collection of mathematical and statistical tools. They’re known by different names, such as management science or operation research. In modern business methods, statistical techniques are also viewed as a part of quantitative management techniques.
When appropriately used, quantitative approaches to management can become a powerful means of analysis, leading to effective decision-making. These techniques help resolve complex business problems by leveraging systematic and scientific methods.
The chapter consists of several aspects of behavioural finance and its foundations such as;
Overconfidence is the tendency for people to overestimate their knowledge, abilities, and the precision of their information, or to be overly sanguine (optimistic) of the future and their ability to control it. It is found that most people most of the time are overconfident is well documented by researchers in the psychology literature.
Overconfidence comes in different forms one of them is miscalibration, the tendency to believe that your knowledge is more precise (accuracy) than it really is.
Prospect theory assumes that losses and gains are valued differently, and thus individuals make decisions based on perceived gains instead of perceived losses. Also known as the "loss-aversion" theory, the general concept is that if two choices are put before an individual, both equal, with one presented in terms of potential gains and the other in terms of possible losses, the former option will be chosen.
Emotion is a complex, subjective experience accompanied by biological and behavioral changes. Emotion involves feeling, thinking, activation of the nervous system, physiological changes, and behavioral changes such as facial expressions.
There are many different types of emotions that have an influence on how we live and interact with others. At times, it may seem like we are ruled by these emotions. The choices we make, the actions we take, and the perceptions we have are all influenced by the emotions we are experiencing at any given moment.
The adaptive market hypothesis (AMH) is an alternative economic theory that combines principles of the well-known and often controversial efficient market hypothesis (EMH) with behavioral finance. It was introduced to the world in 2004 by Massachusetts Institute of Technology (MIT) professor Andrew Lo.
Macroeconomics- Movie Location
This will be used as part of your Personal Professional Portfolio once graded.
Objective:
Prepare a presentation or a paper using research, basic comparative analysis, data organization and application of economic information. You will make an informed assessment of an economic climate outside of the United States to accomplish an entertainment industry objective.
Francesca Gottschalk - How can education support child empowerment.pptxEduSkills OECD
Francesca Gottschalk from the OECD’s Centre for Educational Research and Innovation presents at the Ask an Expert Webinar: How can education support child empowerment?
Honest Reviews of Tim Han LMA Course Program.pptxtimhan337
Personal development courses are widely available today, with each one promising life-changing outcomes. Tim Han’s Life Mastery Achievers (LMA) Course has drawn a lot of interest. In addition to offering my frank assessment of Success Insider’s LMA Course, this piece examines the course’s effects via a variety of Tim Han LMA course reviews and Success Insider comments.
Model Attribute Check Company Auto PropertyCeline George
In Odoo, the multi-company feature allows you to manage multiple companies within a single Odoo database instance. Each company can have its own configurations while still sharing common resources such as products, customers, and suppliers.
A Strategic Approach: GenAI in EducationPeter Windle
Artificial Intelligence (AI) technologies such as Generative AI, Image Generators and Large Language Models have had a dramatic impact on teaching, learning and assessment over the past 18 months. The most immediate threat AI posed was to Academic Integrity with Higher Education Institutes (HEIs) focusing their efforts on combating the use of GenAI in assessment. Guidelines were developed for staff and students, policies put in place too. Innovative educators have forged paths in the use of Generative AI for teaching, learning and assessments leading to pockets of transformation springing up across HEIs, often with little or no top-down guidance, support or direction.
This Gasta posits a strategic approach to integrating AI into HEIs to prepare staff, students and the curriculum for an evolving world and workplace. We will highlight the advantages of working with these technologies beyond the realm of teaching, learning and assessment by considering prompt engineering skills, industry impact, curriculum changes, and the need for staff upskilling. In contrast, not engaging strategically with Generative AI poses risks, including falling behind peers, missed opportunities and failing to ensure our graduates remain employable. The rapid evolution of AI technologies necessitates a proactive and strategic approach if we are to remain relevant.
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
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.
Biological screening of herbal drugs: Introduction and Need for
Phyto-Pharmacological Screening, New Strategies for evaluating
Natural Products, In vitro evaluation techniques for Antioxidants, Antimicrobial and Anticancer drugs. In vivo evaluation techniques
for Anti-inflammatory, Antiulcer, Anticancer, Wound healing, Antidiabetic, Hepatoprotective, Cardio protective, Diuretics and
Antifertility, Toxicity studies as per OECD guidelines
1. Behavioural Finance
Unit-III: Foundation of Rational Finance
Expected Utility Theory [EUT] and Rational Thought: Decision
Making under Risk and Uncertainty - Expected Utility as a basis for
Decision-Making – Theories Based on Expected Utility Concept –
Investor Rationality and Market Efficiency. Self Deception – Forms
of Over Confidence, Causes of Over Confidence, and other Forms
of Self-Deception. Prospect Theory, Difference between EUT and
of Self-Deception. Prospect Theory, Difference between EUT and
Prospect Theory; Agency Theory; SP/A Theory; Framing, Mental
Accounting; Error in Bernoulli’s Theory.
Prepared by
Mr. Dayananda Huded M.Com NET 2 Times, KSET
Teaching Assistant,
Rani Channamma University, PG Centre, Jamkhandi, Karnataka
1
Mr. Dayananda Huded
2. Expected Utility Theory
• "Expected utility" is an economic term summarizing the utility that an entity or
aggregate economy is expected to reach under any number of circumstances. The
expected utility is calculated by taking the weighted average of all possible outcomes
under certain circumstances. With the weights being assigned by the likelihood or
probability, any particular event will occur.
• Expected utility is a theory in economics that estimates the utility of an action when
the outcome is uncertain. It advises choosing the action or event with the maximum
expected utility. At any point in time, the expected utility will be the weighted average
of all the probable utility levels that an entity is expected to reach under specific
circumstances.
circumstances.
• Expected utility refers to the utility of an entity or aggregate economy over a future
period of time, given unknowable circumstances.
• Expected utility theory is used as a tool for analyzing situations in which individuals
must make a decision without knowing the outcomes that may result from that
decision
• The expected utility theory was first posited by Daniel Bernoulli who used it to solve
the St. Petersburg Paradox.
• Expected utility is also used to evaluate situations without immediate payback, such
as purchasing insurance.
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3. • The expected utility hypothesis states that under uncertainty, the weighted
average of all possible levels of utility will best represent the utility at any
given point in time.
• Expected utility theory is used as a tool for analyzing situations in which
individuals must make a decision without knowing the outcomes that may
result from that decision, i.e., decision making under uncertainty. These
individuals will choose the action that will result in the highest expected
utility, which is the sum of the products of probability and utility over all
utility, which is the sum of the products of probability and utility over all
possible outcomes. The decision made will also depend on the agent’s risk
aversion and the utility of other agents.
• This theory also notes that the utility of money does not necessarily
equate to the total value of money. This theory helps explain why people
may take out insurance policies to cover themselves for various risks. The
expected value from paying for insurance would be to lose out
monetarily. The possibility of large-scale losses could lead to a serious
decline in utility because of the diminishing marginal utility of wealth.
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4. Example 1
• For example, suppose:
• A lottery ticket costs ₹ 200.
• The probability of winning the ₹ 20,000 prize is 0.5%
• The likely value from having a lottery ticket will be the
outcome x probability of the event occurring.
• Therefore, expected value = 0.005 x 20,000 = ₹ 100
• The expected value of owning a lottery ticket is ₹ 100. With an
• The expected value of owning a lottery ticket is ₹ 100. With an
infinite number of events, on average, this is the likely payout. Of
course, we may be lucky or maybe unlucky if we play only once.
• Since the ticket costs ₹ 200, it seems an illogical decision to buy –
because the expected value of buying a ticket is ₹ 100 – a smaller
figure than the cost of purchase ₹ 200.
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5. Example 2
• Suppose the chance of house being destroyed by lightning is 0.0001, but
if it is destroyed you lose ₹ 300,000.
• The expected value of your house is therefore 0.9999 x 300,000 = ₹
299,970.
• The expected loss of your house is just ₹ 30.
• An insurance company may be willing to insure against the loss of your
house worth ₹ 300,000 for ₹ 100 a year.
• According to the expected value, you should not insure your house. The
• According to the expected value, you should not insure your house. The
cost of insurance ₹ 100 is far greater than the expected loss ₹ 30 from the
house being destroyed.
• However, the expected utility is different.
• If you are wealthy, paying ₹ 100 only has a small marginal decline in
utility.
• However, if you were unlucky and lost your house the loss of everything
would have a corresponding greater impact on utility.
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6. Expected Utility Theory and Rational Thought
• We must often make decisions under conditions of uncertainty.
• This is logic that prescribes how decisions should be made.
• the utility of a money is not necessarily the same as the total value of money. This
explains why people may take out insurance. The expected value from paying for
insurance would be to lose out monetarily. But, the possibility of large-scale losses could
lead to a serious decline in utility because of the diminishing marginal utility of wealth.
• The expected utility theory takes into account that individuals may be risk-averse.
• The expected utility theory considers it a logical choice to choose the event with the
maximum expected utility. However, in case of risky outcomes, decision-makers may not
choose the action with a higher expected utility. The decision to choose an action will also
depend on the entity’s risk aversion and other entities’ utility.
• Example: A doctor's appointment may result in the early detection and treatment of a
disease
• Applications of Expected Utility
• 1. Public and Economics Policy: The expected utility theory finds application in public
policy, as it explains that the social arrangement that maximizes the total welfare across
society is the most socially right arrangement.
• 2. Ethics: Utilitarians believe that the result of an act determines whether or not the right
action is taken. However, it is extremely difficult to establish the long-term consequence
of an act. Mr. Dayananda Huded 6
7. Decision Making under Risk and Uncertainty
• Making decisions under certainty is easy. The cause and effect are known, and the risk
involved is minimal. What’s tough is making decisions under risk and uncertainty. The
outcome is unpredictable because you don’t have all the information about the
alternatives. Before we learn deeper about decision-making under risk and uncertainty,
let’s look at each of these situations:
• CERTAINTY
• Sometimes we have enough facts and evidence to know the possible results of a decision.
These are the most conducive situations for decision-making because the outcomes are
quite obvious. For instance, if you drop a glass full of milk, the milk will definitely spill.
Such an environment is known as certainty.
• RISK
• Risk is where you are unsure of what can happen, but you know the likelihood of a
• Risk is where you are unsure of what can happen, but you know the likelihood of a
particular outcome. Let’s say you invest in a promising stock and the stock market is on a
surge. In such a scenario, you see a higher chance that your investment will grow.
However, you don’t know the extent to which it can grow. It might double or increase by
10% and in the worst-case scenario, you might even lose money if the market crashes.
Taking a decision under such circumstances is known as decision-making under risk.
• UNCERTAINTY
• In case of an uncertain environment, you can’t predict the outcomes as you have no
information or data available. You have no control over what might happen and don’t even
know the options you have.
• It is like driving blindfolded where you know you need to move but don’t know the type
of vehicle or the road you will be taking. Such a scenario will lead to decision-making
under uncertainty.
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8. • Depending on the amount and degree of knowledge you have, the
conditions are;
• 1. Making decisions under pure uncertainty (I don’t know): You are
ignorant or have absolutely no knowledge, not even about the likelihood
of occurrence for an event. Your behaviour is purely based on your
attitude toward the unknown.
• 2. Making decisions under risk (I know the probability estimates): You
have some knowledge and can assign subjective probabilities regarding
have some knowledge and can assign subjective probabilities regarding
each event.
• 3. Making decisions by acquiring more information (I can acquire reliable
information): You acquire more information and knowkedge to reach a
certain level of certainty.
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9. Decision Making Under Risk
• There are times when you need to make decisions even when you
don’t have adequate or credible information or when the
information obtained from different sources doesn’t match up.
• This happens when you don’t know for sure how each of the
alternatives will pan out and whether you will be able to achieve the
goal by taking a particular decision. However, you have enough
understanding to know how likely each option is to be successful.
• It is this likelihood or probability of each of the options that a
manager needs to take into account and apply experience, expertise,
and gut feeling to the process of decision-making.
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10. Decision Making Under Uncertainty
• Despite all the data crunching and predictive technology, businesses these days have
to deal with a lot of uncertainty and the ‘what if’ scenarios.
• The recent pandemic outbreak has dramatically altered the business landscape
globally. Today, decision-making has become more complicated due to the
uncertainty all around us.
• Let’s say you want to open a couple of new stores for your retail chain, and you have
an idea about the average footfall or the earning that an average outlet generates. Yet,
there is a lot of uncertainty as the operational procedures and customer behavior has
become unpredictable.
become unpredictable.
• Hence, you are compelled to undertake decision-making under uncertainty.
• However, decisions under uncertainty are different from decision-making under risk.
In the latter case, you are not even aware of all the options you have, the risks that
each alternative poses, and the outcomes of all of these options. In fact, you are not
even aware of the probabilities when you opt for decision-making under risk.
• It becomes imperative for managers to use their experience and make assumptions
about the situation and the outcomes while making decisions under uncertainty.
However, they have to rely less on their individual judgment while indulging in
decision making under risk.
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11. Investors Rationality & Market Efficiency
• Definition of rationality, Vriend states: “Rationality in economics means that an
individual agent chooses (one of) the most advantageous options, given his
preferences, in his perceived opportunity set.” and he adds: “such that all
perceived costs and benefits are taken into account; in particular, information,
decision-making and transaction costs”.
• Rationality is a key assumption in many economic models. By assuming that
investors are rational, the volatility, dynamics and unpredictability of human
behavior is constricted. This makes human behavior more static and controllable
allowing for economic models to explain relationships, behavior, market
allowing for economic models to explain relationships, behavior, market
phenomena and such.
• When investors assess the value of stocks and are rational they will find its
theoretical value by calculating the net present value of all future cash flow and
discounting them based on their risk adjusted required return.
• Then if new information arrives the rational investors will rapidly adjust to this
news by buy or selling stocks depending on the nature of the news.
• This will lead to efficiency as stock prices will reflect all existing public
information in the market and continuously adjust to new information.
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12. Irrationality
• So if rationality creates efficiency, rational investors would do best with a
passive strategy of buying and holding the index.
• Yet we observe investors doing things quite contrary to this logic some
examples of this include:
• “Investors follow the advice of financial gurus, fail to diversify, actively
trade stocks and churn their portfolios, sell winning stocks and hold on to
losing stocks thereby increasing their tax liabilities, buy and sell actively
and expensively managed mutual funds, follow stock price patterns and
and expensively managed mutual funds, follow stock price patterns and
other popular models.” (Shleifer, 2000, p.10).
• These common observed types of irrational behavior certainly raise
questions towards assumptions of full rationality of all investors. Still
there are many more anomalies within rationality to be discussed.
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13. Anomalies within Rationality
• 1. Many anomalies concerned with the rational behavior of investors have
been identified. One of these is the endowment effect identified by Thaler
which can be described as that people will value an asset they have higher
than what they themselves would pay to acquire this asset (Kahneman et
al., 1991
• 2. Another type of irrational behavior is seen in Prospect Theory.
• If investors were rational they would aggregate the net effect of gains and
losses associated with an alternative and decide which is more preferable.
losses associated with an alternative and decide which is more preferable.
• However a study in 1979 showed that investors are not that rational in this
way and developed the concept of prospect theory.
• This theory asserts that investors value gains and losses differently.
• Consequently when an investor is faced with two alternatives with equal
expected results but one is conveyed as a possible loss and the other as a
possible gain, the investors will select the latter.
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14. Difference between Expected Utility Theory & Prospect Theory
Expected Utility Theory Prospect Theory
Logic that describes how decisions can
be made
Depicts how humans actually makes risky choices, without
assuming anything about their rationality
Rational Almost irrational
Choices are coherently & consistently
made by weighing outcomes of actions
Prefers more only on gains
Emotions are controlled Emotions, feelings are influencing decision with uncertainty
aggregate economy is expected to
reach under any number of
Loss aversion: losses looms larger than gains
reach under any number of
circumstances.
Mathematical terms and actual losses
and gains are considered
Evaluation is relative to your current reference point (to gain &
losses)
Sometimes absolute values may be
considered while taking decisions
People choices or make decisions not on absolute value but on
psychological values of outcome
Focuses on absolute values. Diminishing sensitivity
Ex. 1. (Gain Point of view) Value Increases from 5000 to 1000
Value increases from 35000 to 40000
2. (Loss point of view) Decreases from 10000 to 5000 and
decreasing 40000 to 35000
The first option looks like vary worst.
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15. • EUT: Marginal utility decreases as increase in wealth (risk aversion)
• PT: Marginal value decreases over gains but increases over losses (risk
aversion for gains, risk seeking for losses).
• EUT: Utility is measured as a function of absolute wealth.
• PT: Value is measured over gains and losses relative to a reference point.
• Ex. Mr. A bought microsoft share @ ₹ 25 and now it is ₹ 35 and Mr. B
bought the same micro-soft share ₹ 45 & he is in loss of ₹ 10 per share.
(loss aversion for Mr. A and risk seeking for Mr. B)
(loss aversion for Mr. A and risk seeking for Mr. B)
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16. Agency Theory
• Agency theory is a principle that is used to explain and resolve issues in the
relationship between business principals and their agents. Most commonly, that
relationship is the one between shareholders, as principals, and company
executives, as agents.
• Agency theory attempts to explain and resolve disputes over the respective
priorities between principals and their agents.
• Principals rely on agents to execute certain transactions, which results in a
difference in agreement on priorities and methods.
• The difference in priorities and interests between agents and principals is known
• The difference in priorities and interests between agents and principals is known
as the principal-agent problem.
• Resolving the differences in expectations is called "reducing agency loss."
• Performance-based compensation is one way that is used to achieve a balance
between principal and agent.
• Agency Theory is a management and economic theory that explains the
• various relationships and areas of self-interest in companies.
• Common principal-agent relationships include shareholders and management,
financial planners and their clients, and lessees and lessors.
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17. • Agency theory assumes that the interests of a principal and an agent are
not always in alignment. The lack of perfect alignment between the
interests of managers and shareholders results in agency costs which
may be defined as the difference between the value of an actual firm
and value of a hypothetical firm in which management and shareholder
interests are perfectly aligned.
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18. Areas of Dispute in Agency Theory
• Agency theory addresses disputes that arise primarily in two key areas: A
difference in goals or a difference in risk aversion.
• For example, company executives, with an eye toward short-term
profitability and elevated compensation, may desire to expand a business
into new, high-risk markets. However, this could pose an unjustified risk
to shareholders, who are most concerned with the long-term growth of
earnings and share price appreciation.
• Another central issue often addressed by agency theory involves
• Another central issue often addressed by agency theory involves
incompatible levels of risk tolerance between a principal and an agent.
For example, shareholders in a bank may object that management has set
the bar too low on loan approvals, thus taking on too great a risk
of defaults.
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19. What Disputes Does Agency Theory Address
• Agency theory addresses disputes that arise primarily in two key areas: A
difference in goals or a difference in risk aversion. Management may desire to
expand a business into new markets, focusing on the prospect of short-term
profitability and elevated compensation. However, this may not sit well with a
more risk-averse group of shareholders, who are most concerned with long-term
growth of earnings and share price appreciation.
• There could also be incompatible levels of risk tolerance between a principal and
an agent. For example, shareholders in a bank may object that management has
set the bar too low on loan approvals, thus taking on too great a risk of defaults.
set the bar too low on loan approvals, thus taking on too great a risk of defaults.
• What Are Effective Methods of Reducing Agency Loss?
• Agency loss is the amount that the principal contends was lost due to the agent
acting contrary to the principal's interests. Chief among the strategies to resolve
disputes between agents and principals is the offering of incentives to corporate
managers to maximize the profits of their principals. The stock options awarded
to company executives have their origin in agency theory and seek to optimize
the relationship between principals and agents. Other practices include tying
executive compensation in part to shareholder returns.
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20. Case Studies (Examples)
• 1. The Enron Scandal
• One particularly famous example of the agency problem is that of Enron.
Enron's directors had a legal obligation to protect and promote investor
interests but had few other incentives to do so. But many analysts believe
the company's board of directors failed to carry out its regulatory role in
the company and rejected its oversight responsibilities, causing the
company to venture into illegal activity. The company went under
following an accounting scandal that resulted in billions of dollars in
following an accounting scandal that resulted in billions of dollars in
losses.
• Enron was, at one point, one of the largest companies in the United States.
Despite being a multi-billion dollar company, Enron began losing money
in 1997. The company also started racking up a lot of debt. Fearing a drop
in share prices, Enron's management team hid the losses by
misrepresenting them through tricky accounting—namely special purpose
vehicles (SPVs), or special purposes entities (SPEs)—resulting in
confusing financial statements.
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21. • The problems started to unfold in 2001. There were questions about
whether the company was overvalued, leading to a drop in share prices
from over ₹ 90 to under ₹ 1.1
• The company ended up filing for bankruptcy in December 2001. Criminal
charges were brought up against several key Enron players including
former chief executive officer (CEO) Kenneth Lay, chief financial officer
(CFO) Andrew Fastow, and Jeffrey Skilling, who was named CEO in
February 2001 but resigned six months later.
February 2001 but resigned six months later.
• The collapse of energy giant Enron in 2001 showed how catastrophic the
agency problem can be. The company's officers and board of directors,
including Chairman Kenneth Lay, CEO Jeffrey Skilling and CFO Andy
Fastow, were selling their Enron stock at higher prices due to false
accounting reports that made the stock seem more valuable than it truly
was. After the scandal was uncovered, thousands of stockholders lost
millions of dollars as Enron share values plummeted.
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22. • 2. Executive Compensation and WorldCom
• When an executive uses company assets to underwrite personal loans, the agency
problem occurs as the company takes on debts to provide its executives with
higher incomes. In 2001, WorldCom CEO Bernard Ebbers took out over ₹ 400
million in loans from the company at the favorable interest rate of 2.15 percent.
WorldCom did not report the amount on its executive compensation tables in its
annual report. Details of the loans did not come out until the company's
accounting scandal hit the news late that year.
• 3. The Boeing Buyback
• 3. The Boeing Buyback
• Aerospace leader Boeing offers an instructive example of how the agency
problem occurs in capital markets. From 1998 to 2001, Boeing had more than
130,000 shareholders. Most of those shareholders were Boeing employees who
purchased company stock through their 401(k) retirement plans. At the same
time, Boeing was planning on buying back much of its stock, driving down its
share price.
• The actions of the executives in charge of caring for the company damaged the
value of its employees' retirement accounts.
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23. Resolving Agency Conflicts
• 1. Creating incentives for employees: If agents are acting in their
own interests, changing incentives to redirect these interests may be
beneficial for principals. “For example, establishing incentives for
achieving sales quotas may result in more sales people reaching
daily sales goals. If the only incentive available to sales people is
hourly pay, employees may have an incentive discouraging sales”.
• 2. Using the market for corporate control: The most frequent
example of market discipline for corporate managers is the hostile
example of market discipline for corporate managers is the hostile
takeover, in which bad managers damage shareholders’ interests by
failing to realize a corporation’s potential value. The solution is to
provide an incentive for better management to take over and
improve operations. Even better:
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24. 3. Block-chain Solutions for Agency Problems
• Blockchain technology allows for the non-existence of internal and external monitoring
that is necessary in corporate governance. The technology allows for guarantees to build
trust to overcome agency problems. It's easier for a company to be efficient by lowering
agency costs and relationship.
• Blockchain offers solutions to agency problems by moving former supervisor tasks to a
decentralized computer network that is not depended on human mistake or
greed. Blockchain eliminates agency costs such as supervising agents by creating a
trusting relationship between the agent and the principal.
• The participating principals and agents will have guarantees that directly address corporate
governance problems. Given the blockchain guarantees, this kind of technology allows for
governance problems. Given the blockchain guarantees, this kind of technology allows for
a different solution to agency problems.
• Blockchain and its security system are immutable, which creates trust between the parties
in their contractual relationship. Therefore, no party can bend the rules in the blockchain
code. The principal has no reason to monitor agency costs since blockchain addresses the
agency problems in corporate governance.
• Agency governance continues without intermediaries in the blockchain such as principal
control, third-party risk, and intermediaries, as well as market performance and private
investors. Controls and verifications, including regular meeting with shareholders, finance
disclosures, financial press, and hedge fund investors, are no longer needed in the
blockchain.
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25. SP/A Theory
• SPA theory, a psychologically based theory of choice among risky
alternatives, was proposed by Lola Lopes and further developed by Lopes
and Oden.
• Lopes’ 1987 article, “The Psychology of Risk : Between Hope and Fear”
captures the idea that the emotions of hope and fear influence the choice
among risky alternatives.
• According to SPA theory, people evaluate risky alternatives by using an
objective function which has three arguments, viz., security (S), potential
objective function which has three arguments, viz., security (S), potential
(P) and aspiration (A).
• Let us consider two decision-makers who are faced with an identical risk,
or prospect D. However, they experience different degrees of fear.
Understandably, the decision maker who experiences more fear will
attach greater importance to the probability of unfavourable events,
compared to the decision maker who experiences less fear. In Lopes’
framework, the h-function for a person who experiences neither fear nor
hope is simply the identity function h(D) = D.
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26. • For a person who experiences only fear, and no hope, the h-function is strictly
convex in D. It is flat in the neighborhood of 0 and steep in the neighborhood of I
. It may be represented as:
• hs(D) = q > 1
• For a person who experiences only hope, the h-function is strictly concave in D.
It may be represented as a power function.
• h(D) = 1–(1–D), p > 1
• For a person who experiences both fear and hope, the h-function has an inverse-S
shape.
• Formally, Lopes uses a convex combination of the power functions hs and hp to
• Formally, Lopes uses a convex combination of the power functions hs and hp to
represent the case. Graphically, the four h-functions are shown below.
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27. Framing
• There can be different ways of presenting a decision problem and it
appears that people’s decisions are influenced by the manner of
presentation. A decision frame represents how a decision maker views
the problem and its possible consequences.
• Framing effect is a cognitive bias in which the brain makes decisions
about information depending upon how information is presented. It is
often used to influence decision makers and purchases. It takes advantage
of tendency for people to view the same information but respond to it in
of tendency for people to view the same information but respond to it in
different ways depending on whether a specific option is presented in a
positive frame or in a negative frame.
• To demonstrate frame dependence, Tversky and Kahneman posed simple
problems like the following to their students. The government estimates
that 600 people will die due to a deadly outbreak of Asian flu, if nothing
is done. To tackle this problem, the government is considering two
alternative programmes.
Mr. Dayananda Huded 27
28. • Programme A : Develop a vaccine which can save 200 lives.
• Programme B : Develop a vaccine which will stop anyone from dying provided it
works. The probability that it will work is one-third. If it doesn’t work no one
will cured.
• When students were asked to choose one of the two programmes 75% of them
chose programme A. The risk of seeing all 600 victims die was considered too
much to be compensated by the hope that all would be saved.
• Kahneman and Tversky reformulated the question and posed it to a different
group of students. To tackle the same health problem two choices were offered:
group of students. To tackle the same health problem two choices were offered:
• Programme C : Accept that 400 victims of the flu will die.
• Programme D : Cure all the 600 victims of the flu with a probability of one-third.
• When students were asked to choose between these two options, two-thirds of the
students chose programme D. The statement ‘400 would die’ scared most
students, even though it has actually the same outcome as that of programme A
above, but expressed in more dire terms, it is evident that what matters it is not
just what you ask but also how you ask.
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29. Mental Accounting
• In reality, however, people do not have the computational skills and will power to evaluate
decisions in terms of their impact on overall wealth. It is intellectually difficult and
emotionally burdensome to figure out how every short-term decision (like buying a new
phone or throwing a party) will bear on what will happen to the wealth position in the long
run.
• So, as a practical expedient, people separate their money into various mental accounts and
treat a rupee in one account differently from a rupee in another because each account has a
different significance to them.
• The concept of mental accounting was proposed by Richard Thaler, one of the brightest
stars of Behavioural finance.
stars of Behavioural finance.
• Mental accounting tends to describe the process whereby people code, categorize and
evaluate economic outcomes. It deals with budgeting and categorization of expenditures.
• Businesses, governments and other establishments use accounting to track, separate and
categorise various financial transactions. People, on the other hand, use a system of mental
accounting. The human brain is similar to a file cabinet in which there is a separate folder
(account) for each decision, which contains the costs and benefits associated with that
decision. Once an outcome is assigned to a mental account, it is difficult to view it in any
other way.
• While money does not come with labels, the human mind puts labels on it.
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30. Bernoulli Theory
• To solve St. Peters Bung Paradox, famous mathematician Daniel
Bernoulli proposed a theory.
• According to which “a person should not, accept a highly risky
investment choice if the potential returns will provide little utility or
value.”
• It further states that a person accepts risk not only on the basis of possible
losses or gains but also based upon the utility gained from the risky action
itself.
itself.
• The St. Petersburg Paradox was a question that asked, essentially, why
people are reluctant to participate in fair games where the chance of
winning is as likely as the chance of losing.
• Bernoulli’s Hypothesis solved the paradox by introducing the concept of
expected utility and stating that the amount of utility from playing a
game is a significant decision factor in whether or not to participate.
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31. Error in Bernoulli’s Theory
• 1. The longevity of the theory of expected utility proposed by Bernoulli is
all the more remarkable because it is seriously erroneous. The error in his
theory is not in what is states explicitly; rather, it lies in what it ignores or
tacitly assumes.
• To understand this, consider the following scenarios.
• Ex. Today Ram and Shyam have a wealth of ₹ 10 lakh. Yesterday, Ram
had ₹ 5 lakh and Shyam had ₹ 15 lakh. Is their happiness the same? (Do
they have the same utility?)
they have the same utility?)
• According to Bernoulli’s theory, utility depends on wealth and since Ram
and Shyam have the same wealth, they should be equally happy. Your
common sense, however, tells you that today Ram will be elated and
Shyam despondent.
• Thus, Bernoulli’s theory must be wrong.
• The happiness that Ram and Shyam experience is a function of the recent
change in wealth, in relation to the different states of wealth that define
their reference points.
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32. • 2. Here is another example of what Bernoulli’s theory misses. Consider Ravi
and Geeta:
• Ravi’s current wealth is ₹ 2 million.
• Geeta’s current wealth is ₹ 5 million.
• Both of them are offered a choice between a gamble and a sure thing, in lieu
of their current wealth, and they have to opt for one of them.
• Gamble : It has two equiprobable outcomes: ₹ 2 million or ₹ 5 million
• OR
• OR
• Sure Things ₹ 3 million for sure As per Bernoulli’s analysis. Ravi and Geeta
face the same choice: expected wealth of ₹ 2 million, if they opt for the
gamble or a certain wealth of ₹ 3 million, if they opt for the something.
Bernoulli would expect Ravi and Geeta to make the same choice assuming
that their utility function is the same. However, this prediction is not correct.
Bernoulli’s theory fails here as it does not allow for the different reference
points from which Ravi and Geeta evaluate their options. Imagine yourself to
be in Ravi’s and Geeta’s shoes and are likely to think as follows.
Mr. Dayananda Huded 32
33. • The sure thing of ₹ 3 million will increase my wealth (which is currently
₹ 2 million) Ravi: by 50 per cent with certainty and this is quite attractive.
The gamble provides an equal chance of increasing my wealth to ₹ 5
million or gain nothing.”
• Geeta: “The sure thing of ₹ 3 million will decrease my wealth (which is
currently ₹ 5 million) by 40 per cent with certainty, which is awful.
• The gamble provides an equal chance of not losing anything or losing 60
per cent of my wealth.”
per cent of my wealth.”
• Ravi is most likely to choose the “sure thing” whereas Geeta is most
likely to choose to gamble.” The “sure thing” makes Ravi happy but
Geeta miserable.
• Ravi is happy with the “sure thing because it guarantees an increase of 50
per cent whereas the gamble may mean that he has a 50 per cent chance
that he will gain nothing.
Mr. Dayananda Huded 33
34. • Geeta does not like the “sure” thing because it means that she will suffer
40 per cent erosion of her wealth. The “gamble” apppeals to her because
it offers a 50 per cent chance that she can protect her wealth.
• Neither Ravi nor Geeta thinks in terms of states of wealth. Ravi thinks of
gains, Geeta thinks of losses.
• While the possible states of wealth they face are the same, the
psychological outcomes they assess are entirely different.
• Since Bernouilli’s model lacks the idea of a reference point, expected
• Since Bernouilli’s model lacks the idea of a reference point, expected
utility theory ignores the fact that the outcome that appeals to Ravi is not
acceptable to Geeta.
• Bernouilli’s model can explain Ravi’s risk aversion but it cannot, explain
Geeta’s preference for a gamble. Her risk-seeking behaviour is similar to
what is often observed in entrepreneurs and military generals when all the
options they face are bad.
Mr. Dayananda Huded 34
35. 7 R theory
• 1. Remuneration (salary)
• 2. Rate of return on business income
• 3. Return on investment
• 4. Rent on house (Rental income)
• 5. Rights or royalty on books or patents
• 6. Royalty
• 7. Franchising fees (Replication)
• 7. Franchising fees (Replication)
Mr. Dayananda Huded 35