By,

P Vasavi

B Venkat

M Preethi Bhavani

G Shravya Reddy

B Rajesh Reddy

S Nikhileshwar

P Abhishek

Behavioural Finance

What is Behavioral Finance?

A field of finance that proposes

psychology-based theories to

explain stock market anomalies.

Within behavioral finance, it is

assumed that the information

structure and the characteristics

of market participants

systematically influence

individuals' investment decisions

as well as market outcomes.

AVERSION TO AMBIGUITY

In decision theory and economics, ambiguity

aversion also known as uncertainty aversion

describes a preference for known risks over

unknown risks.

MENTAL ACCOUNTING

An economic concept

established by economist

Richard Thaler, which

contends that individuals

divide their current and

future assets into separate,

non-transferable portions.

The theory purports

individuals assign different

levels of utility to each

asset group, which affects

their consumption

decisions and other

behaviors.

FRAMING

Framing is a cognitive heuristic in which people

tend to reach conclusions based on the 'framework'

within which a situation was presented.

AVAILABILITY BIAS

The giving of preference

by decision makers to information and events that

are more recent, that were observed personally, and

were more memorable. This is because memorable

events tend to be more magnified and are likely to

cause an emotional reaction.

CONFIRMATION BIAS

In psychology and cognitive

science, confirmation

bias (or confirmatory bias)

is a tendency to search for or

interpret information in a

way that confirms one's

preconceptions, leading to

statistical errors.

ANCHORING

The use of irrelevant information as a reference for evaluating

or estimating some unknown value or information.

In this type, people stick to initial information and won’t let it

go. They even do not want to accept new information.

INNUMERACY BIAS

Natural inability to cognitively process and evaluate

probability and ratios is called innumeracy bias.

Difficulty in evaluation of ratios and probabilities.

GAMBLERS FALLACY

When an individual erroneously

believes that the onset of a certain

random event is less likely to happen

following an event or a series of

events.

This line of thinking is incorrect

because past events do not change

the probability that certain events

will occur in the future.

HINDSIGHT BIAS

A psychological phenomenon in which past events seem to

be more prominent than they appeared while they were

occurring.

A tendency to think that one would have known actual events

were coming before they happened.

SELF ATTRIBUTION BIAS

Self-attribution bias occurs

when people attribute

successful outcomes to their

own skill but blame

unsuccessful outcomes on

bad luck.

HERD BEHAVIOUR

It is the tendency for

individuals to mimic the

actions of a larger group.

Individually, most people

would not necessarily make the

same choice. This is called

herd behavior

REPRESENTATIVE BIAS

A Representativeness Bias is a cognitive

bias in which an individual categorizes a

situation based on a pattern of previous

experiences or beliefs about the scenario.

It can be useful when trying to make a

quick decision but it can also be limiting

because it leads to close-mindedness.

Possible

mistakes Rudy’s

clients would

make..

Bob Miller

Illusion of control

Anchoring

Mary Swanson

Herd Behaviour

Jack and Kelly

Self attribution bias Self protecting bias

Herb and Bark Nichols

Gamblers Fallacy

Client ProfilesClient Age Investmen

t horizon

Objective Risk

profile

Portfolio Advice

Bob

Miller

42 23 Retire

comfortably

at 65

Teacher Growth

70 %equity

30% bonds

No changes

Mary

Swanson

60+ 30 Stable

income

Retired

professor

60 %equity

40%bonds

$1million

5%gold

5%real

estate

Transfer

Jack

&Kelly

Klein

35 30 Save for

retirement

Do not

have lot of

asstes

85%equity

15%bonds

Buy more at

market low

Herb &

Barb

Nichols

50 10 Grow

money

Have

short term

liquidity

needs

$100000

75%equity

25%bonds

No stock can

fall to zero