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Behavioral finance case study
A SURVEY OF BEHAVIORAL FINANCE° summary
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Behavioural Biases of Individuals/Analyst Traditional finance perspective theorist believes that individuals who have will to venture into investment activities does not allow their emotions to be guided by how investment information is presented to them. However, the same cannot be said for the behavioural finance perspective. Through psychological studies, researchers of behavioural finance have come to the understanding of how human behaviour and behavioural finance connected. This connection can create behavioural biases which can positively or negatively impact on the growth of investment opportunities. This research is on behavioural biases is categorized into two specific groups, cognitive errors and emotional biases. Cognitive Errors Cognitive errors are seen as basic statistical information processing, or memory errors that cause the decision to deviate from rationality. This may involve incorrectly updating or overlooking the prospects of investment information, which can be pertinent to growth of an investment. Additional, Cognitive errors are separated into two classifications types; Belief Perseverance and Information Processing Biases. Belief perseverance, with is relative to cognitive dissonance, is the mental discomfort that humans experience when recent information can contradict the previously held one. Information processing biases are considered as processing errors that are used irrationally in financial or investment decision making. Belief perseverance is spread across five sections; conservatism, confirmation, representation, illusion of control and hindsight. Conservatism is when individuals fail to incorporate new information as it becomes available, and continues to maintain their existing forecast. Inve... ... middle of paper ... ...s doing nothing to make positive changes to an outcome. This occurs when person are accustom to the way situations are. The endowment bias is where individuals place a greater value on an asset that they own than one that they do not own. This is, an individual may want to purchase a valuable item for less than it is being offered for, however, if they receive the purchase they will value it higher than the original asking price. The avoidance of decision making due to the fear of unfavourable decision outcomes is called regret-aversion. This consists of two types; error of commission and error of omission. Error of commission is when there is fear of taking an action whereas; error of omission is the fear from not taking an action. Here investments tend to be over conservatively made and there in more comfort in doing what the other players in the market are doing.
Personality predispositions can determine levels of extraversion, which determine the levels to which one seeks social support, thus determining positive affect. Similarly, personality predispositions can determine levels of neuroticism that may influence one’s style of coping in the face of both positive and negative external factors which can determine negative affect (Diener, 1996). Happiness, a core aspect of positive subjective wellbeing, involves maintaining a superior level of positive affect in comparison to negative effect, based on specific positive or negative emotions linked to the recent experiences in one’s life (Emmons & Diener, 1985). Positive emotions such as joy and pride must trump negative emotions such as frustration and sadness in the recent past or present in order for an individual to feel happy. Life satisfaction builds on this and is a cognitive valuation of the quality of an individual’s experiences as a sum throughout their entire life (Emmons & Diener, 1985). Individual personality traits have been found to influence the different patterns and levels of life satisfaction, positive and negative affects and simply general, overall happiness (McCrae, 1983).
...(which they do not control)” (Taleb). People should become more involved with the financial process. A person should save their money for the future instead of relying on investments to pay off. When investing they should choose things that are low risk and not take a large gamble.
... be avoided. When we look at an investment opportunity it is important to recognize the “gut” feeling as our initial response but not necessarily the right response. Being aware of this can help avoid falling into an optimist bias and poorly budgeting for the future.
Shermer, Michael. The mind of the market: how biology and psychology shape our economic lives. New York: Henry Holt and Co., 2009. Print.
Additionally, and antithetically, consider the example of the student studying for a mathematics test the following morning whose belief is that since he is and has been studying and has a good working knowledge of the subject area, that he will do well on the test and does so the following morning. When compared to another student doing the same but is less prepared and knowledgeable in the area and additionally thinks that he will fail and did, he performed better because of his positive expectation and preparedness. Take a moment to reconsider the inclusion of the idea of preparation in the example. Here, preparation is just as important a factor to consider because it is a variable that can greatly surpass the influence of the self-fulfilling prophecy. The other student who did not prepare well and did not know the material as well would have failed anyway, despite how great of preconceived thoughts he may have had. In this case, because the concept...
Ultimately, this study shows that it is common for one person to rely on knowledge of another person’s financial aspect of life when determining whether or not to invest interest in them. Of course, there are other matters that could have altered these results such as if racial, cultural, age, or gender differences/expectations were considered. The matter of this study is prevalent in the field social psychology as well as everyday life.
Creating ways to handle problems with guidance approach are very much like a journey to me. Teachers practice guidance when they help children to learn from their mistakes, rather than punish them for mistake they make, and it should not be considered as misbehaviour, but as mistaken behaviour. This reminds us that Child is just at the beginning of a lifelong learning process. At this stage we all make mistakes. Mistaken behaviour is made up of three different levels which in themselves explain each level in the learning process as they lack the experience and interaction to know the difference and therefore make errors in judgement in their actions. The three levels
Overall, an average person’s judgements and decisions are rarely error free, logical, and unbiased. Just like the illusion of control isn’t very error free, logical, and unbiased. There is no way to plan for all the spontaneous events that life likely throws at you. Whether it is planning a nice dinner, a wild party, or a family vacation; there is always a chance for it to end in disaster. A certain demographic acquires the adaptive capacity to recognize this and move forward, while others cannot. Are you one of the many to realize and move past, or does the illusion control
Growing up in a very accepting and forward home, I always found myself to be free of most bias. Having been the target of some racial prejudice in the past, I always told myself that I would make sure nobody else had to feel the same way. While this may be a great way to think, it really only covers the fact that you will not have any explicit bias. What I have realized during the course of this class is that implicit bias often has a much stronger effect on us than we might think, and even the most conscious people can be affected.
There is a lot of research work going on in this particular field, more so since the crisis of 2008. The purpose of this article was to make readers aware of the subject .Behavioral finance is an interesting mix of logics, psychology and economics. Budding investors and management students should look into this in more detail so that they are better equipped to make financial decisions.
It is not a big secret that America’s quality of education is sub-par. According the article, “US 17th In Global Education Ranking; Finland, South Korea Claim Top Spots” by Amrutha Gayathri, it’s obvious from the title alone that the United States is falling behind. Without change, the United States will continue to be behind in education. An issue that currently plagues the American education system is gender bias. Gender bias in schools has been addressed in laws, but it still persists in American schools, such as Title IX of the Education Amendments of 1972 and the U.S. code Title 42, Chapter 21 regarding Civil Rights. Both laws attempt to discourage gender bias through the illegality of gender discrimination. Title IX addresses bias in federally funded educational and athletic programs in schools and colleges within the United States. Title 42, Chapter 21 of the U.S. Code prohibits discrimination based on gender, age, race, religion, and other characteristics within a number of settings, including education. Despite these laws, gender bias is still prevalent within American schools. A proposed solution to gender bias is gender segregated classrooms, which has proven to be a popular alternative to co-ed classrooms. Leonard Sax, author of “Six Degrees of Separation: What Teachers Need to Know about the Emerging Science of Sex Differences,” is a leading proponent of single-sex schools. Single-sex schools are not without critics though. Jaclyn Zubrzycki’s article, “Single-Gender Schools Scrutinized,” claims that single-sex environments “are not inherently beneficial for boys or most girls.” When considering both Zubrycki’s and Sax’s findings, it would seem that the ideal solution to liberate the American education system of gender...
Lepori, G.M. 2009. Dark Omens in the sky: Do Superstitious Beliefs Affect Investment Decisions. Copenhagen: Copenhagen Business School. SSRN. http://papers.ssrn.com/ (assessed February 22, 2011).
Our understanding and the concept of investment in behavioural finance combines economics and psychology to analyse how and why investors make final decision. As an investor one’s decision to invest is fully influence by different type of attitudes of behavioural and psychological ( Ricciardi & Simon, 2000). Yet, in order to maximize their financial goal, investors must have a good investment planning. Furthermore , to gain a good investment planning , there must be a good decision making among investors. They have to choose the right investment plan I order to manage the resources for different type of investments not only to gain profit wise but also to avoid the risk that occur from investment.
In the human mind there are many things that go into decision-making every single day. The strong impetus that drive one’s decision in a situation: certainty and doubt. These feelings that people often have are connected very closely. It would be extremely beneficial for each and every person to be certain in all situations. Both certainty and doubt can be, and have been, the deciding factor in reaching a goal or failing in reaching it. Doubt in oneself oftentimes leads to lack of certainty, and a lack of certainty brings about doubt, and this relationship is key to success or failure in all walks of life. Both certainty and doubt are extremely forceful elements that often alter decision-making and play a huge role in people’s lives and history,