Got a tricky question? Receive an answer from students like you! Try us!

Behavioural Finance - Essay Example

Only on StudentShare
Masters
Essay
Finance & Accounting
Pages 3 (753 words)

Summary

Topic: Behavioural Finance Name Professor Institution Course Date Many studies in the area of behavioural finance suggest that individual investors make systematic errors due to behavioural biases. Do you believe that more sophisticated investors (e.g. equity fund managers) can capitalize on such individual investors’ errors and consistently outperform the market on a risk-adjusted basis?…

Extract of sample
Behavioural Finance

It is very clear that some of the participants in the market do not make rational decisions which translate to mistakes. However, astute market players get the chance to capitalize on such mistakes. For instance, a rational investor can take the decision to buy when there is market crash resulting from speculative behavior (Mussweiller & Schneller, 2003, p. 124). Given a risk-adjusted basis, rational investors can beat market performance in a consistent manner. According to the perfect market hypothesis, prices reflect the full information about the market. This has the implication that an investor cannot beat the market unless he or she has inside information. A number of indices have been created with the aim of mimicking market performance. Research studies indicate that index funds account for almost 10 percent of the U.S. stock market capitalization and 60 percent of the money flowing into mutual funds. Despite the increasing euphoria towards passive management, there is active management which has enabled investors beat market bearing returns. Behavioral finance insists that investors are irrational in their decisions and that it is easy to partly predict future performance of stocks using their past performance. ...
Download paper
Not exactly what you need?

Related Essays

Behavioural Finance Viev On Market Bubbles
This paper investigates these market events through relevant research material and identifies the anatomy and behavioral finance phenomena of the events using information. The tulip bulbs speculation, which was at its peak in February 1637, and the consequent market crash that followed mark the most notorious economic hard times in the History of Dutch (Goldgar, 2007:5). Together with Britain’s Sothern Sea Buble in the 18th century, these are the earliest example of irrational market behavior that affected investors in Europe. The Semper Augustus, a tulip bulb type, was both sublime and…
10 pages (2510 words)
Efficient Markets Theory and Behavioral Finance
In this theory, therefore, assumptions are done perpetuating that the information organisation and the behaviour of market participants systematically control individuals’ decisions in investment and the outcomes of the market. According to (Malkiel, 2003) the efficient market theory, has implications of theoretical perspectives to the market trends, while it ignores or under estimate the practical perception of the market. On the other hand, the behavioural finance theory has been thought of being more practical based and focused on people’s behaviour (Ashta & Patil, 2007). Following the…
6 pages (1506 words)
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…
6 pages (1506 words)
Development of Behavioural Finance
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…
5 pages (1255 words)
Coursework Assignment BEHAVIOURAL FINANCE VIEW ON MARKET BUBBLES
During the period of tulip mania it has been observed that the cost of a single tulip had surpassed the average income of an expert employee. The period of tulip mania was considered to be a golden age in the Dutch calendar where the prices of the tulip bulbs reached to an unexpected extent (Thompson, 2006). Literature Review and Explanation of Tulip Mania (of the 17th century) At present time, Dutch flower industry comprise about 70% of global flower production and about 90% of global flower trade. From the past time, Dutch flowers were traded to Europe, where the bulbs of flowers were sold…
4 pages (1004 words)
Behavioural Finance
Adverse and extreme climatic conditions have increased in frequency and severity and adapting to these changes has now become a reality (Stiglitz, 2010, 19). Due to the rising population, the demand for natural resources has risen which has led to overexploitation of natural resources and degradation of the environment, food and oil prices have skyrocketed and debt crisis in most countries has reached an alarming levels. The new paradigm was discussed when Bhutan invited delegates for a high level meeting to discuss on happiness and wellbeing and to pursue the elaboration of methods that I the…
12 pages (3012 words)
BEHAVIOURAL FINANCE AND MARKET EFFICIENCY
Due to the presence of inefficiency within the global market, the sales and profitability of a company is not only affected but also the country’s ability to build a more reliable capital asset. Therefore, in response to poor market efficiency, the study on behavioural finance has gained importance back in 1990s2. Using knowledge on behavioural finance, the main causes and underlying drivers of the most recent global financial crisis will be identified and tackled in details. As part of analyzing the factors that has triggered the recent global financial crisis, both behavioural and…
12 pages (3012 words)