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Behavioural Finance Implications on Personal Investment Decisions - Essay Example

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Behavioural Finance Implications on Personal Investment Decisions

This calls for better understanding and insight of the nature of human in the current global outlook, plus advancement of fine skills and the capability to achieve the best from investments. Furthermore, investors need to develop foresight, positive vision, drive and perseverance (BAKER, & NOFSINGER, 2010: p23). Investors vary in all features due to factors such as demographic factors, which entail educational achievement level, socio-economic background, sex, age, and race. The most critical hurdle faced by investors is in the region of investment choices. The most favourable investment decision is a vital consideration and should be proactive in nature. During the design of the investment portfolio, of key consideration should be their financial objectives, the level of risk tolerance, as well as other restrictions. Furthermore, they have to forecast the product mean-variance optimization. This procedure is best appropriate for institutional investors, and more often than not fails for people, who are vulnerable to behavioural prejudice. In the current circumstances, behavioural finance is increasingly attaining an integral position in the decision-making procedure, since it increasingly affects the performance of investors (SHEFRIN, 2007: p77). Investors can better their performance by identifying errors and biases of judgement, which are common to every human being. Comprehending the behavioural finance will play a vital role in enabling the investors to adopt a better investment mechanism and evade future repetition of costly errors. The relevant issues of this investigative study are how to reduce or abolish the psychological prejudices in investment decision procedure. According to the conventional financial theory, makers of decisions are logical. On the contrary, modern theories propose that the decision- making carried out by investors are not propelled by due deliberations (POMPIAN, 2012: p45). The decisions carried out by the investors are also frequently inconsistent. In other words, decisions made by humans are prone to numerous cognitive illusions. They are categorised into two types heuristic decision process and process theory. Heuristic decision theory is a decision criterion through which the investors discover things for themselves. It refers to thumb rules, which people utilize to make decisions in uncertain and complicated situations (SCHINDLER, 2007: p86). In reality, the decision-making criteria of investors are not completely reasonable. This may be so even when the investors have gathered the necessary information and purposefully investigated, in which the emotional and mental aspects are entailed. They are not easy to distinguish. Though it may be beneficial sometimes, numerous times it may cause uninformed decision outcomes. First, it includes representativeness. The recent accomplishments of investors tend to proceed into the future (POMPIAN, 2012: p82). The propensity of investors to come up with decisions based on history experiences is called stereotype. Recent analyses are leaning towards the failure or success, in their profit projections, the nature of stereotype choices. Secondly, overconfidence is another factor. Several points of views surround confidence, as it accords more courage and is perceived as a key to prosperity. Even though, ...Show more

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Behavioural Finance Implications on Personal Investment Decisions Name University Course Tutor 14th March 2012 Introduction Decision-making is a vital yet a complex practice. Effective decisions cannot be made by only considering composite models and personal resources that do not take regard of the situation (POMPIAN, 2006: p12)…
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