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.
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.
Defined Expected utility theory,
Defined Prospect Theory,
Defined Disposition effect
Defined Heuristics and biases
Contact: rehankango@ymail.com +92337548656
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.
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.
Defined Expected utility theory,
Defined Prospect Theory,
Defined Disposition effect
Defined Heuristics and biases
Contact: rehankango@ymail.com +92337548656
Behavioral Finance key notes for non financial managers. This help also the financial advisors discover the type of behavioral finance biases among their clients.
It also highlight the types of financial risks, and types of clients according to their risk capacity and risk tolerance.
It also add value to investors specially in the investment decision making process.
Join CMT Level 1, 2 & 3 Program Courses & become a professional Technical Analyst, CMT USA Best COACHING CLASSES. CMT Institute Live Classes by Expert Faculty. Exams are available in India. Best Career in Financial Market.
https://www.ptaindia.com/chartered-market-technician/
Behavioral Finance key notes for non financial managers. This help also the financial advisors discover the type of behavioral finance biases among their clients.
It also highlight the types of financial risks, and types of clients according to their risk capacity and risk tolerance.
It also add value to investors specially in the investment decision making process.
Join CMT Level 1, 2 & 3 Program Courses & become a professional Technical Analyst, CMT USA Best COACHING CLASSES. CMT Institute Live Classes by Expert Faculty. Exams are available in India. Best Career in Financial Market.
https://www.ptaindia.com/chartered-market-technician/
Week One material for Wealth Management course.
The information contained in this presentation is for illustrative and informational purposes only and should not be considered investment advice.
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
how to sell pi coins in South Korea profitably.DOT TECH
Yes. You can sell your pi network coins in South Korea or any other country, by finding a verified pi merchant
What is a verified pi merchant?
Since pi network is not launched yet on any exchange, the only way you can sell pi coins is by selling to a verified pi merchant, and this is because pi network is not launched yet on any exchange and no pre-sale or ico offerings Is done on pi.
Since there is no pre-sale, the only way exchanges can get pi is by buying from miners. So a pi merchant facilitates these transactions by acting as a bridge for both transactions.
How can i find a pi vendor/merchant?
Well for those who haven't traded with a pi merchant or who don't already have one. I will leave the telegram id of my personal pi merchant who i trade pi with.
Tele gram: @Pi_vendor_247
#pi #sell #nigeria #pinetwork #picoins #sellpi #Nigerian #tradepi #pinetworkcoins #sellmypi
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
If you are looking for a pi coin investor. Then look no further because I have the right one he is a pi vendor (he buy and resell to whales in China). I met him on a crypto conference and ever since I and my friends have sold more than 10k pi coins to him And he bought all and still want more. I will drop his telegram handle below just send him a message.
@Pi_vendor_247
how to sell pi coins in all Africa Countries.DOT TECH
Yes. You can sell your pi network for other cryptocurrencies like Bitcoin, usdt , Ethereum and other currencies And this is done easily with the help from a pi merchant.
What is a pi merchant ?
Since pi is not launched yet in any exchange. The only way you can sell right now is through merchants.
A verified Pi merchant is someone who buys pi network coins from miners and resell them to investors looking forward to hold massive quantities of pi coins before mainnet launch in 2026.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
how can I sell pi coins after successfully completing KYCDOT TECH
Pi coins is not launched yet in any exchange 💱 this means it's not swappable, the current pi displaying on coin market cap is the iou version of pi. And you can learn all about that on my previous post.
RIGHT NOW THE ONLY WAY you can sell pi coins is through verified pi merchants. A pi merchant is someone who buys pi coins and resell them to exchanges and crypto whales. Looking forward to hold massive quantities of pi coins before the mainnet launch.
This is because pi network is not doing any pre-sale or ico offerings, the only way to get my coins is from buying from miners. So a merchant facilitates the transactions between the miners and these exchanges holding pi.
I and my friends has sold more than 6000 pi coins successfully with this method. I will be happy to share the contact of my personal pi merchant. The one i trade with, if you have your own merchant you can trade with them. For those who are new.
Message: @Pi_vendor_247 on telegram.
I wouldn't advise you selling all percentage of the pi coins. Leave at least a before so its a win win during open mainnet. Have a nice day pioneers ♥️
#kyc #mainnet #picoins #pi #sellpi #piwallet
#pinetwork
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
where can I find a legit pi merchant onlineDOT TECH
Yes. This is very easy what you need is a recommendation from someone who has successfully traded pi coins before with a merchant.
Who is a pi merchant?
A pi merchant is someone who buys pi network coins and resell them to Investors looking forward to hold thousands of pi coins before the open mainnet.
I will leave the telegram contact of my personal pi merchant to trade with
@Pi_vendor_247
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
4. SO THESE TWO SYSTEM WORKS-
• System 1 operates automatically and rapidly. It requires little or no effort
and is not amenable to voluntary control.
• System 2 is effortful, deliberate, and slow. It requires mental activities that
may be demanding, including complex calculation.
4
5. SYSTEM-1
• Here are some examples of the automatic activities attributable to System 1, in rough order
of complexity.
Detect that one object is nearer than another.
Discern friendliness in a voice.
Answer 2+1=?
Drive a bicycle on an empty road.
Comprehend simple sentences.
• All these mental events occur automatically and require practically no effort.
5
6. SYSTEM-2
• While the activities of System 1 normally run on an automatic pilot and are involuntary, the
operations of System 2 require attention and voluntary effort. Here are some examples of the
operations of system 2.
Identify the clowns in the circus.
Discern the voice of a friend in a crowded and noisy room.
Walk at a speed faster than is natural for you.
Control your behaviour in a social situation.
Count the number of times the letter “a” occurs in a paragraph.
Compare two refrigerators for overall value.
Calculate the product of 113x 737.
Pick holes in a complex argument.
6
10. DID BEHAVIOURAL FINANCE CAME ABOUT AS A
WAY TO EXPLAIN RATIONALLY THE IRRATIONAL
BEHAVIOR OF MARKETS AND INVESTORS ?
HOW MANY AGREE TO DISAGREE?
0R
INFACT AGREE
11. BEHAVIORAL FINANCE, INTRODUCTION
“The investor’s chief problem, and even his worst enemy, is likely to be himself”- Benjamin Graham
“There are three factors that influence the market: Fear, Greed, and Greed.”- Market folklore
• Sooner or later, you are going to make an investment decision that winds up costing you a lot of
money.
• Why is this going to happen?
• You made a sound decision, but you are “unlucky”.
• You made a bad decision-one that could have been avoided.
• The beginning of investment wisdom:
• Learn to recognize circumstances leading to poor decisions
• Then, you will reduce the damage from investment blunder
11
12. WHAT IS BEHAVIORAL
FINANCE?
It is the study of the
influence of
psychology on the
behavior of investors
or financial analysts.
It also includes the
subsequent effects on
the markets.
12
It focuses on the fact
that investors are not
always rational,
have limits to their
self-control, and are
influenced by their
own biases.
13. WHAT IS BEHAVIORAL
FINANCE?
A field of finance that proposes psychology-
based theories to explain stock market
anomalies. Within behavioral finance, it is
assumed that the information structure and the
characteristics of market participants
systematically influence individuals' investment
decisions as well as market outcomes.
13
14. WHAT IS IT?
Study that seeks to combine psychology, sociology and traditional finance.
Helps explain why people make irrational financial decision.
14
WHAT IS IT IMPORTANT?
It is necessary because technical “analysis assume” that people act rationally.
Psychology
Behavioral
finance
Sociology
Finance
15. TRADITIONAL
FINANCIAL
THEORY
Traditional finance includes:
• Both the market and investors are
perfectly rational
• Investors truly care about utilitarian
characteristics
• Investors have perfect self-control
• They are not confused by cognitive
errors or information processing
errors
17. BEHAVIORAL
FINANCE THEORY
Traits of behavioral finance are:
• Investors are treated as “normal”
not “rational”
• They actually have limits to their
self-control
• Investors are influenced by their
own biases
• Investors make cognitive errors that
can lead to wrong decisions
18. CONVENTIONAL VS BEHAVIORAL
Traditional Financial Theory
In order to better understand behavioral finance, let’s first
look at traditional financial theory.
Traditional finance includes the following beliefs:
• Both the market and investor are perfectly rational
• Investors truly care about utilitarian characteristics
• Investors have perfect self-control
• They are not confused by cognitive errors or information
processing errors
Behavioral Finance Theory
Traits of behavioral finance are:
• Investors are treated as “normal” not “rational”
• They actually have limits to their self-control
• Investors are influenced by their own biases
• Investors make cognitive errors that can lead to wrong
decisions
18
19. WHY BEHAVIORAL FINANCE?
• Conventional or modern finance is based on rational and logical theories, such as the capital asset
pricing model (CAPM) and the efficient market hypothesis (EMH).
• These theories assume that people, for the most part, behave rationally and predictably.
• One of the most rudimentary assumptions that conventional economics and finance makes is that
people are rational “wealth maximizers” who seek to increase their own well-being.
• Behavioral finance seeks to explain our actions, whereas modern finance seeks to explain the
actions of the “economic man”
19
22. BEHAVIORAL FINANCE MAY ALSO BE DEFINED BY THE MODIFICATIONS IT HAS MADE TO A
STANDARD FINANCE FRAMEWORK
Here is a catch-all description given by Statman (2014):
Behavioral finance substitutes normal people for the rational people in standard finance.
It substitutes behavioral portfolio theory for mean-variance portfolio theory, and behavioral asset
pricing models for the CAPM and other models where expected returns are determined only by risk.
Behavioral finance expands the domain of finance beyond portfolios, asset pricing, and market
efficiency.
It explores the behavior of investors and managers in direct and indirect ways, whether by examining
brains in fMRIs or examining wants, errors, preferences, and behavior in questionnaires, experiments,
and the field.
Behavioral finance explores saving and spending behavior and it explores financial choices affected
by culture, fairness, social responsibility, and other expressive and emotional wants.
22
25. EVOLUTION OF
BEHAVIORAL
FINANCE
The case (Reading)
ARTICLE ON BF- CONCEPT.pdf
Standard finance theory is accepted world-wide from market
level perspective. But in1960s and 1970s, new wave in field of
finance has been started by psychologist, study of heuristics
found many biases and limit to cognitive resources, through
examining economic decisions.
It was started by study of Slovic (1969,1972) studied stock
brokers and investors.
Slovic (1972) states the money Game: “You are—face it—a
bunch of emotions, prejudices, and twitches, and this is all very
well as long as you know it.
Successful speculators do not necessarily have a complete portrait
of themselves, warts and all, in their own mind, but they do have
the ability to stop abruptly when their intuition and what is
happening out there are suddenly out of kilter. If you don’t know
who you are, this is an expensive place to find out.”
Recognition of the contribution that behavioural analysis is now
significant in financial economics was reflected in 2002 with
Awards of the Nobel Prize in economics to professor of
psychology, Daniel Kahneman, where he detailed the heuristics
and biases that occur when making decisions under uncertainty.
27. THE 3 IDEAS MAKE HIM GOT THE NOBEL PRIZE IN 2017
27 RICHARD THALER
28. THE BOOK- BY THALER
• Those 3 ideas developed by Richard
Thaler, that change the way we think and
behave:
• 1. Bounded rationality- mental
accounting
• 2. lack of self-control – dilemma/mental
illusion
• 3. nudges- push or a positive
reinforcement
28
31. Behavioral finance views
investors as “normal” but being
subject to decision-making biases
and errors. We can break down
the decision making biases and
errors into four buckets.
31
DECISION-MAKING ERRORS AND BIASES
32. SELF DECEPTION
• It limits to the way we learn.
• We mistakenly think we know more than
we actually do, and we tend to miss
information that we need to make an
informed decision.
32
33. HEURISTIC
SIMPLIFICATION
We can also scope out a bucket that is
often called heuristic simplification.
Heuristic simplification refers to
information-processing errors.
34. EMOTION
• Emotion in behavioral finance refers to the
decisions based on our current emotional
state.
• Our current mood may take our decision
making off track from rational thinking.
34
36. BIASES IN BEHAVIORAL FINANCE- ONE SHOULD REALISE
Loss Aversion
Framing Bias
Anchoring Bias
Herding Bias
Mental Accounting
Disposition Effect
Prospect & Regret
Media Response
Overconfidence &
illusion of control
Self Attribution Bias
Hindsight Bias
Confirmation Bias
37. 37
Situation 1: While you are walking, you find a Rs. 100 note lying on the
ground. You pocket it and feel happy about it
Situation 2: While you are walking, you find a Rs. 200 note lying on the
ground. You pocket it and subsequently, someone picks your pocket and
you lose Rs. 100.
Which situation do you think will make you happier? The answer would
be in Situation 1.
Although you gained Rs. 100 in both cases, the emotional outcomes are
different. A loss of Rs.100 gave you more pain than the gain of Rs. 200.
LOSS AVERSION-
38. 38
We experience the same thing while investing. Consider the below scenarios
You invested Rs. 1,000 and sold at a value of Rs. 2,000. The same investment has touched a
high of say Rs. 3,000 and is now trading at say Rs. 2,000. The pain from the notional loss of Rs
1,000 will be much more compared to the overall gain on the investment.
This behaviour is also evident from the fact that most people prefer Fixed Deposits even for long-
term goals even though instruments like Mutual Funds although don’t have guaranteed returns,
have a better ability to beat inflation over the long run.
40. AVERSION TO AMBIGUITY
In decision theory and economics,
ambiguity aversion also known as
uncertainty aversion describes a
preference for known risks over
unknown risks.
40
41. MENTAL ACCOUNTING
An economic concept established
by economist Richard Thaler, which
contends that individuals divide
their current and future assets into
separate, non-transferable
portions. The theory purports
individuals assign different levels
of utility to each asset group,
which affects their consumption
decisions and other behaviors.
41
42. FRAMING
Framing is a cognitive heuristic in which people tend to
reach conclusions based on the 'framework' within which
a situation was presented. BF Framing.pptx
42
43. AVAILABILITY BIAS
The giving of preference by decision makers to information and
events that are more recent, that were observed personally, and
were more memorable. This is because memorable events tend to
be more magnified and are likely to cause an emotional reaction.
43
44. CONFIRMATION BIAS
In psychology and cognitive science,
confirmation bias (or confirmatory
bias) is a tendency to search for or
interpret information in a way that
confirms one's preconceptions,
leading to statistical errors.
44
45. ANCHORING
In psychology and cognitive science, confirmation bias (or confirmatory
bias) is a tendency to search for or interpret information in a way that
confirms one's preconceptions, leading to statistical errors.
45
46. ANCHORING
• It’s a tendency to attach or anchor our thought to a reference point even if its not logical or supported by
underlying facts.
• For instance-
• If NALCO’s share was at 75 when the sensex stood at 33000. In the meantime post-budget , sensex has
gone down to 30000 and so do the share price of NALCO around 60.
• So one will start thinking since post budget market and sensex had start rallying, NALCO will also regain
and invest.
• But in the meantime there might be some fundamental change affecting NALCO as a PSU, which will keep
the price to be depressed
• That’s called anchoring bias in investment.
47. INNUMERACY BIAS
Natural inability to cognitively process and evaluate probability
and ratios is called innumeracy bias.
Difficulty in evaluation of ratios and probabilities.
47
48. GAMBLERS FALLACY
When an individual erroneously believes
that the onset of a certain random event is
less likely to happen following an event or a
series of events.
This line of thinking is incorrect because
past events do not change the probability
that certain events will occur in the future.
48
49. HINDSIGHT BIAS
A psychological phenomenon in which past events seem to be more
prominent than they appeared while they were occurring.
A tendency to think that one would have known actual events were
coming before they happened.
49
50. SELF ATTRIBUTION BIAS
Self-attribution bias occurs
when people attribute
successful outcomes to their
own skill but blame
unsuccessful outcomes on
bad luck.
50
51. HERD BEHAVIOR
It is the tendency for
individuals to mimic the
actions of a larger group.
Individually, most people
would not necessarily make
the same choice. This is
called herd behavior
51
52. REPRESENTATIVE BIAS
A Representativeness Bias is a
cognitive bias in which an individual
categorizes a situation based on a
pattern of previous experiences or
beliefs about the scenario. It can be
useful when trying to make a quick
decision but it can also be limiting
because it leads to close-mindedness.
52
58. CLIENT PROFILES
58
Client Age Investmen t
horizon
Objective Risk
profile
Portfolio
Bob
Miller
42 23 Retire
comfortably
at 65
Teacher Growth
70 %equity
30% bonds
Mary
Swanson
60+ 30 Stable
income
Retired
professor
60 %equity
40%bonds
$1million
5%gold
5%real
estate
Jack
&Kelly
Klein
35 30 Save for
retirement
Do not
have lot of
assets
85%equity
15%bonds
Herb &
Barb
Nichols
50 10 Grow
money
Have short
term
liquidity
needs
$100000
75%equity
25%bonds
Advice
No changes
Transfer
Buy more at
market low
No stock can
fall to zero
59. CAN QUANTITATIVE TRADING FACTOR IN BEHAVIOURAL
BIASES
• In recent history use of data science and quantitative research and modelling has failed to factor
in investor behaviour and response to events like Covid pandemic and flaring up of tension in
Middle East due to killing of Iranian General Quassem Soleimani by America in Baghdad airport.
• In case of Soleimani killing while crude surged by 4%, US and Germany Treasury yield
nosedived and US stock indexes were up as a knee jerk reaction. In the absence of any such even
factored into the models used by Quant traders their investor lost wealth.
• Similar was the fate of most of the quant fund managers when most of them had to loose wealth
in the aftermath of Covid pandemic outbreak.
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60. WHAT IS QUANT TRADING
• Quantitative trading is a type of market strategy that relies on mathematical and statistical
models to identify – and often execute – opportunities. The models are driven by quantitative
analysis, which is where the strategy gets its name from. It's frequently referred to as ‘quant
trading’, or sometimes just 'quant'.
• Quantitative analysis uses research and measurement to strip complex patterns of behaviour into
numerical values. It ignores qualitative analysis, which evaluates opportunities based on subjective
factors such as management expertise or brand name.
• Quantitative trading works by using data-based models to determine the probability of a certain
outcome happening.
• Unlike other forms of trading, it relies solely on statistical methods and programming to do this.
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61. • You may, for example, spot that volume spikes on Apple stock are quickly followed by significant
price moves.
• So, you build a program that looks for this pattern across Apple’s entire market history.
• If it finds that the pattern has resulted in a move upwards 95% of the time in the past, your model
will predict a 95% probability that similar patterns will occur in the future.
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62. QUANTITATIVE VS ALGORITHMIC TRADING
• Algorithmic (algo) traders use automated systems that analyse chart patterns then open and close positions on their behalf. Quant traders
use statistical methods to identify, but not necessarily execute, opportunities. While they overlap each other, these are two separate
techniques that shouldn’t be confused.
• Here are a few important distinctions between the two:
• Algorithmic systems will always execute on your behalf. Some quant traders use models to identify opportunities, but then open the position
manually
• Quantitative trading uses advanced mathematical methods. Algorithmic tends to rely on more traditional technical analysis
• Algorithmic trading only uses chart analysis and data from exchanges to find new positions. Quant traders use lots of different datasets
• What data might a quant trader look at?
• The two most common data points examined by quant traders are price and volume. But any parameter that can be distilled into a
numerical value can be incorporated into a strategy. Some traders, for example, might build tools to monitor investor sentiment across social
media.
• There are lots of publicly available databases that quant traders use to inform and build their statistical models. These alternative datasets
are used to identify patterns outside of traditional financial sources, such as fundamentals.
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63. QUANTITATIVE TRADING -CASE
• Let's say, for example, that you hypothesize that the NIFTY/SENSEX is more likely to move in a certain
direction at a particular point in the trading day. So you build a program that examines a large set of
market data on the NIFTY and breaks down its price moves by every second of every day. That's a
simple example of a quant trading strategy using just one data parameter: price action. Most
quantitative traders pull on several different sources at once to build far more intricate models with a
better probability of identifying profitable opportunities.
• What is a quant trader and what do they do?
• A quant trader is usually very different from a traditional investor, and they take a very different
approach to trading. Instead of relying on their expertise in the financial markets, quant traders
(quants) are mathematicians through and through. Most firms hiring quants will look for a degree in
maths, engineering or financial modelling. They’ll want experience in data mining and creating
automated systems.
• As well as building their own strategies, quant traders will often customize an existing one with a
proven success rate. But instead of using the model to identify opportunities manually, a quant trader
builds a program to do it for themselves.
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64. OVERCOMING BEHAVIORAL FINANCE ISSUES
#1 Focus on the Process
• Reflexive – going with guts
• Reflective – Logical and methodical
#2 Prepare, Plan and Pre-Commit
• Behavioral finance teaches us to invest by preparing,
by planning, and by making sure we pre-commit.
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65. FEW OF MY WORKS-
https://www.semanticscholar.org/paper/Calendar-Anomalies-in-the-Banking-and-it-Index%3A-The-
Singh-Das/ffabe2857d7e10828ac8f39acfbf2f3a20406e2b?p2df
https://www.ijstr.org/final-print/mar2020/Role-Of-Emotional-Bias-On-Investment-Decision-From-
Behavioural-Finance-Perspective.pdf
https://www.ijrte.org/wp-content/uploads/papers/v8i3/C6592098319.pdf
FOR SURVEY-
https://forms.gle/EdrPsqCZUm3Xtp527
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66. PROSPECT THEORY
According to Prospect Theory, these are two stages of decision
making-
1. Editing Stage
2. Evaluation Stage
In Editing Stage, decision makers frame the choice in terms of
potential gain or loss in reference to a fixed reference point.
In Evaluation Stage, the decision maker employ on S-shaped value
curve.
67. To understand how the disposition effect works:-
To sell winners & ride losers emerges in prospect theory
Eg. Consider an investor who bought a stock a month ago for Rs 100, but the
stock is currently selling for Rs 80.
Let us assume that the investor expects the stock to go back to Rs 100 or fall
further to Rs 60, both outcomes being equi-probable. The possibilities are
displayed-
0.5
Rs 60
Rs 100
Rs 80
0.5
68. According to Prospect Theory, the investor frames his choices as choice
between two lotteries:-
A. Sell the stock now & realise what had been a “paper loss” of
Rs.20
B. Hold the stock for one more period with equal odds of
“breakeven” & losing additional Rs 20.
The choice between those lotteries falls in the loss region as in Figure .
So, it is associated with the common portion of the S-shaped value.
69. B will be preferred over A
Change in
Wealth
Value
0
72. PROPOSITION 1
The decision whether to moderate or adapt to a client’s behavioral biases during the asset
allocation process depends fundamentally on the client's level of wealth.
Specifically, the wealthier the client, the more the practitioner should adopt to the client’s behavioral
biases.
The less wealthy, the more the practitioner should moderate a client’s biases.
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73. PROPOSITION 2
The decision whether to moderate or adapt to a client’s behavioral biases during the asset
allocation process depends fundamentally on the type of behavioral bias the client exhibits.
Specifically, clients exhibiting cognitive biases should be moderated, while those exhibiting
emotional biases should be adapted to.
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74. VISUAL DEPICTION OF PROPOSITION 1 AND PROPOSITION 2
74
High Level of Wealth
(Adapt)
Moderate and Adapt
Moderate
Adapt
Moderate and Adapt
Cognitive Biases
(Moderate)
Emotional Biases
(Adapt)
Low Level of Wealth
(Moderate)
75. CASE A
Ms. Samaira is a single 65-year-old with a modest lifestyle and no income beyond what her investment
portfolio of $1 million generates. Her primary investment goal is to not outlive her assets; she does not,
under any circumstances, want to lose money becoz she recalls that her relative lost money in the crash of
1929, Ms. Samaira exhibits these behavioral biases:
• Loss aversion- the tendency to feel the pain of losses more than the pleasure of gain.
• Anchoring and adjustment-the tendency to believe that current market levels are “right” by unevenly weighting recent experience.
• Selective memory- the tendency to recall only events consistent with one’s understanding of the past.
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76. CASE B
Mr. Jones is a single 50-year-old pharmaceutical executive earning $250,000 a year. He lives
extravagantly, occasionally spending more than his income, but has saved approximately $1.5 million.
His primary investment goal is to donate $3 million to his alma mater, but he cannot obtain life insurance.
Mr. Jones exhibits the following biases:
• Loss aversion
• Overconfidence- the tendency to over-estimate one’s investment savvy
• Lack of self-control- the tendency to spend today rather than save for tomorrow.
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77. CASE C
The Roy family includes a financially well-informed couple, both aged 36, and two children aged 4 and 6.
They are financially sound, but were not invested during the bull market of the 1900s as many of their
neighbor's were. The couple’s total income $120,000, is, like the family itself, not expected to grow
significantly. They have saved $150,000 which they hope will be the financial foundation from which they
will send their children to college and retire comfortably. The Roys suffer from:
• Loss aversion
• Regret- the tendency to feel deep disappointed for having made incorrect decisions
• Availability bias- the tendency to believe that what is easily recalled is more likely
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78. APART FROM THAT, FOLLOWING WERE THE ALLOCATIONS FOR EACH OF THE
THREE INVESTORS-
• Samaira:75% bonds,15% stocks, 10% cash
• Jones- 85% stocks,10% cash, 5% cash
• Roy Family- 70% stocks,25% bonds, 5% cash
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79. THREE FUNDAMENTAL QUESTIONS WHICH ARISES-
• 1. What effect do a client’s biases have on the asset allocation decision?
• 2. Should you moderate or adapt to these biases if you were in their position?
• 3.What is the best practical allocation for each investor?
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80. GUIDELINES FOR OVERCOMING PSYCHOLOGICAL
BIASES
Understand the Biases
Focus on the Big Picture
Rely on Words and Numbers, not Sights and Sounds
Follow a Set of Quantitative Investment Criteria
Diversify
Take Care of the Downside
Control Your Investment Environment
Strive to Earn Market Returns
Track Your Feelings
Review Your Biases Periodically
Rebalance
81. CAN THERE BE AN END TO BEHAVIOURIAL BIASES?
81
While we cannot cure the behavioral biases we’re born with, we can certainly try to mitigate their effects.
Whether you’re a personal investor, an investment manager, a financial planner, or a broker, you can
benefit from understanding the driving forces behind investment decisions.
In “The End of Behavioral Finance,” we believe that one day behavioral finance will no longer be as
controversial as it once was;
That one day, its ideas will become part of the mainstream.
Eventually, individuals might wonder, “what kind of other finance is there?”