This was followed by Selden’s ground breaking work on the stock exchange where he attempted to explain people’s financial behaviour in the stock exchanges (Selden, 1912). Further work on behavourial finance continued through the efforts of psychologists such as Leon Festinger who introduced the concept of cognitive dissonance (Festinger et al., 1956). The more modern trends in behavourial finance were placed by Tversky and Kahneman who introduced the availability heuristic that delineated the financial probability of decision making by a person (Tversky & Kahneman, 1973). This idea was followed by another expected utility theory that critiqued the original theory. This new theory delineated a descriptive model of decision making when faced with risks. The emerging model was espoused as the prospect theory (Kahneman & Tverksy, 1979). The prospect theory presented by Kahneman and Tversky has also been suggested as the alternative financial explanation for people making less than expected decisions in a risky market situation. The sixties saw the application of cognitive psychology to the processing of information by the brain. This stood in contrast to behavioural models. The newly emerging cognitive models were being compared to each other such as those presented by Ward Edwards, Daniel Kahneman and Amos Tversky. This was augmented by the development of mathematical psychology that began to link up transivity of individual preferences to different kinds of measurement scales (Luce, 2000). These developments were augmented with the introduction of newer concepts such as overconfidence that forces individuals to make irrational choices which lead to poor financial decision making (Kahneman & Diener, 2003). The bounded rationality projections in behavioural finance project that individuals act to maximise satisfaction rather than utility through their financial decision making even though it may lead to a loss (Gigerenzer & Selten, 2002) (Tsang, 2008). Over the years, various kinds of psychological traits like projection bias, overconfidence, limited attention and the like have been used in behavioural finance models. The domain of inter-temporal choice has also had various applications of behavioural finance which tend to use various kinds of psychological factors to explain basic models of rational choice. Active Portfolio Management versus Passive Portfolio Management Fund managers carry out active portfolio management so that the portfolio investments tend to outperform a particular investment benchmark index. In contrast, fund managers who are not looking to outperform any investment benchmark index try to invest in funds that replicate previous weightings and returns. This technique is labelled as passive portfolio management (Malkiel, 1996). Passive portfolio management is the most preferred investment technique on the equity market but it is gaining wider acceptance in other investment fields. The contention behind passive management is to reduce transactional costs as well as investment risks so that the investor’s output increases. In the modern economy it is common for funds to be managed with the original fund owners relying on fund managers to take investment decisions. According to Cuoco and Kaniel (2009), in 2004 the total amount of managed mutual funds exceeded $8 trillion, hedge funds totalled $1 billion and pension funds totalled more than $12 billion in the United States alone. It has also been
Development of Behavioural Finance Behavioural finance deals with the study of the effects of various social, emotional and cognitive factors that affect the financial decision making of individuals. The major concern of behavioural finance is to track down why individuals operating in a market tend to make the choices they make…
The author gives a holistic approach to the issue of happiness. He states that happiness has at least three meanings: happiness as a mood; happiness as satisfaction with one’s life and happiness as a thriving and satisfying life that has an impact on humanity. These classes of happiness can be calculated by public policy and universal targets.
As a result of having poor market efficiency, a lot of global investors have become reluctant in investing their money on local and internal businesses. In general, the ability of each country to develop efficient market has something to do with the development of capital asset1.
As opposed to traditional finance, whose underlying assumption is that investors are "rational" beings; this rationality tries to point out that as the fund managers receive information they react spontaneously and update their briefs as soon as possible and also explains that given their briefs they make choices that are normatively acceptable1.
The growth and development of the theories and models of this special area of finance has led to new development in the stock market. Though, individual investors form an insignificant portion of the total stock market investment, the behaviour exhibited by them can have great influence on the performance of the stock market and trading.
The growth and development of the theories and models of this special area of finance has led to new development in the stock market. Though, individual investors form an insignificant portion of the total stock market
The assertion is that a market risk premium has adjusting asset prices to account for risk differences. The consumer desires to obtain maximum utility and satisfaction while getting maximum profits for the entrepreneur.
At equilibrium, capital asset prices
del into consideration, one can conclude that it is applicable in tracking stocks prices since it comprises of degree of randomness which tends to be steady with the instability of commodity.
This model can be applied in finance and physics via modeling random behavior, which
Moreover, economists must hypothesize that particular aggregate time series are generated by probability model which has to be estimated and tested.Koopmans considered it unscientific for economics in any other case. However, Kydland and
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