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Introduction of Behavioral Finance
1. DISCOVER . LEARN . EMPOWER
Nature, Scope, and
Significance of
Behavioral Finance
CHANDIGARH UNIVERSITY
DEPARTMENT OF COMMERCE
Bachelors of Commerce
Behavioural Finance (22CMT256)
BY MUKUL [E9048]
3. Introduction to Behavioral Finance
• Traditional finance theories assume that investors are
rational and make decisions based on all available information.
• Behavioral finance integrates insights from psychology and
economics to understand how individuals make financial
decisions.
• It explores the emotional, cognitive, and psychological
factors that influence financial choices.
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5. Significance of Behavioral Finance
• 1. Explains Irrational Behavior: It helps explain why individuals make
seemingly irrational financial decisions.
• 2. Predicts Market Anomalies: It predicts market anomalies that traditional
theories cannot account for.
• 3. Improves Decision-Making: It provides tools and techniques to improve
investment decision-making by recognizing and addressing biases.
• 4. Enhances Portfolio Performance: Behavioral insights can lead to more
robust portfolio strategies that adapt to changing market conditions.
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7. Heuristic Driven Biases - Representative Bias
Characteristics of Representative Bias:
• 1. Stereotyping: People often make decisions by assuming that past
patterns or stereotypes are representative of the current situation.
• 2. Neglect of Base Rates: They may ignore statistical base rates and rely
heavily on anecdotal or vivid information.
• 3. Overlooking Probabilities: This bias can lead to an overestimation of the
likelihood of an event based on its resemblance to past instances.
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9. APPLICATIONS
After going through this presentation,
• Students will understand the objectives of spot trading.
• Students will explicate the need for derivative trading.
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10. FAQ’S
What is behavioral finance, and how does it differ from traditional finance
theories?
• Behavioral finance is a field that integrates insights from psychology and
economics to understand how individuals make financial decisions. Unlike
traditional finance theories that assume rationality, behavioral finance
recognizes the role of emotions, cognitive biases, and heuristics in influencing
decision-making.
What is the representative bias, and how can it impact investment
choices?
• The representative bias is a cognitive bias where individuals make judgments
or decisions based on stereotypes or past experiences, often ignoring
statistical probabilities. In investments, this bias can lead to misjudging stock
performance or making choices based on superficial resemblances to past
successes. 10
11. FAQ’S
How does regret aversion affect decision-making, and what are its
implications in career choices?
• Regret aversion is the tendency to avoid decisions that might lead to future
feelings of regret. It can hinder risk-taking and innovation and may lead to
missed opportunities in career decisions, as individuals opt for safer choices
to avoid potential regrets.
What strategies can be employed to mitigate overconfidence in
investment decisions?
• To mitigate overconfidence, investors can employ data-driven decision-
making, diversification, and seeking external feedback. Recognizing one's
limitations and relying on objective analysis rather than gut feelings are key to
addressing overconfidence bias.
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12. FAQ’S
How can ambiguity aversion influence financial decision-making,
especially in uncertain or innovative investment opportunities?
• Ambiguity aversion is the preference for known risks over unknown risks. In
financial decision-making, this bias can lead individuals to avoid new and
innovative investment opportunities with unclear probabilities, potentially
missing out on higher returns. Diversification and education on risk
assessment can help mitigate this bias.
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