Behavioral Finance

1297 Words3 Pages
bulb-icon

Recommended: Rational and non rational decision making

Economics is probably the science that arguably has had the most impact in today’s times. In fact it can barely be called a science in a strict sense, since human behavior is not governed by laws of nature unlike other non living objects, which makes the prediction and forecasting stock prices, economic conditions all the more difficult. In recent decades economists have tried to give a more structured and mathematical explanation to their theories concerning how human beings make their decisions. However these theories have come under immense criticism as they don’t hold true in real time. In reality, human beings rarely behave rationally which is the basic assumption in many of the economic theories; rather we make a lot of our decisions based on our intuition and limited knowledge available to us. When the financial crisis of 2008 came upon us, a lot of questions were raised on the apparent predictive abilities of the various economic theories. Merely 12 economists were able to foresee the massive crisis which now shows signs of deepening into a double dip recession. Since then economists have looked at alternative theories to explain and predict the real world dynamics. This is where the behavioral economics comes in. Among other things, it seeks to explain why humans behave how they behave, what are the impacts of this in the economy (here we are particularly concerned with financial markets), how we can avoid various biases to make better investment decisions. What is the role of investor’s confidence in the financial markets? Why a downgrade of the US treasury sends ripples in the stock markets all over the world .How do investors react to such kind of information? Do we take all the information into account before... ... middle of paper ... ...s have shown that humans are risk averse, and they value loss more than gains from a bet, which means that wealth shows diminishing marginal utility. 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. Works Cited Predictably Irrational: Dan Ariely. Fooled by Randomness: Nicholas Nassim Taleb Black Swan: Nicholas Nassim Taleb. Research paper: Behavioral Finance: Thomas Sewell. Research paper: Herd Behavior in Financial Markets: Sushil Bikchandani and Sunil Sharma. Buttonwood blog (The Economist): Foolishness of the crowd.

Show More
Related

  • Four of the Major Economists' Theories

    2610 Words  | 6 Pages

    Although most economists cannot come to agreement on the definition of economics, the preceding quote from l. Robbins, in my opinion, seems to just about sum it up. Since the beginning, when man first had to choose between hunting and sleeping, there was economics. Today economics is in everything we buy, use, and make, from the gas in our cars to the food on our tables, economics plays a vital role with the manufacture, distrubution and consumption of each. To help us better understand the economic trends, certain men have become economist. In this paper I will revisit four of the major economists’ theories. Starting with the theories of Adam Smith, a philosopher well as an economist, to the modern (relatively) day theories of Milton Friedman, a Nobel Prize awardee, we will chronologically review the theories of Adam Smith, Karl Marx, John Maynard Keynes, and Milton Friedman.

    Read More

  • Critical Review of a Technology and Economics Article

    1276 Words  | 3 Pages

    Although the author does raise some very interesting and provoking questions in the beginning of the article, unfortunately, some of them are very difficult to answer, or just can’t be answered. While the article doesn’t solve any problems, it does raise awareness and creates some interesting connections with the present and the past. The overall question the author wishes to answer is "how can economists understand and explain the nature of societal change?"

    Read More

  • Behavioral Economics, By Daniel Kahneman's Theory Of Economics

    1153 Words  | 3 Pages

    Before the theories of behavioral economics clarified by Daniel Kahneman, economics was a generally straightforward field. Adding this new approach to consumer behavior makes us seem less like robots acting only as economics expects us to act and more like the more or less irrational beings we are. Daniel Kahneman is one of only a couple non-economists and the first psychologist to win the Nobel prize in Economics for his work in the relatively new field of behavioral economics.

    Read More

  • Great Depression In Canada

    530 Words  | 2 Pages

    Analyzing past economic events will allow people to learn from previous mistakes. The policies and legislation that is currently in place within a country was established for a reason and it is

    Read More

  • The Efficient Market Hypothesis

    1830 Words  | 4 Pages

    The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics during the last 40 years. “Behavioural finance, however, is now seriously challenging this premise by arguing that people are clearly not rational” (Ross, (2002)). Behavioral finance uses facts from psychology and other human sciences in order to explain human investors’ behaviors.

    Read More

  • Paul A. Samuelson was the Last Generalist of Economics

    1104 Words  | 3 Pages

    Paul A. Samuelson, one of the men who made Harvard’s reputation, made various contributions to modern economics. Samuelson brought numerous theories to the table, showing that math is an effective and necessary component of understanding economics. Furthermore, he discovered a new obstacle regarding inflation, known as “cost-push” inflation. But most importantly, Paul A. Samuelson has shown that economic theories can be timeless, however their implementation evolves around the current economic circumstances that are in play.

    Read More

  • PMCN Case Study

    3336 Words  | 7 Pages

    The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions. The ideas of economists and politicians, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." (John Maynard Keynes, the General Theory of Employment, Interest and Money p 383)

    Read More

  • Stock Market Case Study

    1515 Words  | 4 Pages

    Psychologists, Daniel Kahneman and Amos Tversky, created what is considered the most famous element of behavioral economics; prospect theory. Prospect theory is a theory of how people form decisions about prospects. A prospect is a gamble or a decision made about uncertainty. Within prospect theory, the value function represents how people value things. The weighting function infers how people deal with probabilities. People don’t weigh gains and losses the same. What they found is that people’s value or utility diminishes as they gain more. But for losses, it’s the

    Read More

  • System 1 Vs System 2 Thinking Essay

    602 Words  | 2 Pages

    Due to this passive view or narrow framing, people fail to understand the totality of a give situation. The rational-agent model assumes that investors make their choices in a comprehensively inclusive, broad framing manner, which factors all relevant details, including future opportunities and risk. In reality, investors have the tendency to evaluate their portfolios based on an extremely short time horizon. In addition, investor decisions about a particular investment are often considered in isolation of the total portfolio, especially if a loss occurs, as opposed to a comprehensive manner. Ultimately, short-term evaluations lead to excessive trading, increased portfolio expenses and

    Read More

  • The Capital Asset Pricing Model

    605 Words  | 2 Pages

    where E_w is the expected future wealth and σ_w indicates the predicted standard deviation of the possible divergence of actual future wealth from the expected future wealth E_w. Thus, for risk-averse investors, dU⁄(dE_w )>0 and dU⁄(dσ_w )<0. In the presence of two risky assets, the investment opportunity curve is determined by assets’ expected rate of return, risk and the correlation between different assets. The same analysis also applies to determining the utility of an investor who invests in the combination of ri...

    Read More

  • Finance Personal Statement

    548 Words  | 2 Pages

    Finance is a field that had always fascinated me right from my undergraduate college days. What make me interested in this particular field of study are the art of finance and the complexity of investment market which would allow me to employ my personal skills, such as analytical and communication skills, along with my personal characteristics such as dedication and compassion for what I do. As one of the most important sector in the world, I believe it would provide me with a broad range of career options.

    Read More

  • Micro and Macro Economics

    569 Words  | 2 Pages

    The main objective of economist is to maintain maximum output in production. In order to reach maximum efficiency, there are three questions that economists have to address. What to produce? Who are we going to produce these goods for? And, how are we going to produce it? All of these questions were answered by Adam Smith, a famous economist. Smith believes that there is such a thing as an “invisible hand” of economics that acts as the decider to all the basic three economic questions (Group Presentation).

    Read More

  • Free College Admissions Essays: Passion for Economics

    445 Words  | 1 Pages

    The crucial importance and relevance of economics related disciplines to the modern world have led me to want to pursue the study of these social sciences at a higher level. My study of Economics has shown me the fundamental part it plays in our lives and I would like to approach it with an open mind - interested but not yet fully informed.

    Read More

  • Behavioural Finance Case Study

    1800 Words  | 4 Pages

    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.

    Read More

  • Financial Theories And Strategies

    1533 Words  | 4 Pages

    This paper will define and discuss five financial theories and how they impact business decisions made by financial managers. The theories will be the Modern Portfolio Theory, Tobin Separation Theorem, Equilibrium Theory, Arbitrage Pricing Theory (APT), and the Efficient Markets Hypothesis.

    Read More

More about Behavioral Finance

Open Document