BEHAVIORAL FINANCE(ROLE OF PSYCOLOGICAL FACTORS IN FINANCIAL DESCIONS)

PRESENTED BY:- HUMAIRA KALSOOM

Influence of psychology on

behavior of financial

practitioners.And subsequent

effect on markets.

• Explains how

and when markets might be inefficient?

• Sub discipline of

behavioral economics

• Incorporating findings from psycology+sociology

SO, WHAT DOES MODERN FINANCE SAYS?

VARIOUS MODELS OF DESCION MAKING.

NORMATIVE

PRESCRIPTIV

E DESCRIPTIVE

RESEARCH IN BEHAVIORAL FINANCE IS SLOW;

Debondt & Thaler work-a land mark

Biases in human judgment &descion making.

Investor behavior &market anomalies.

Need for theoretical frame work.

Endowment effect

WHY DO COGNITIVE BIASES OCCUR? Use of heuristics.They are economical &effective usually.Leads to irrational descions.

SIMPLE MODELS V/S COMPLEX MODELSTENNIS MATCH EXAMPLE. BANKING INDUSTRY EXAMPLE

MODERN FINANCE IS COMPLEX ,TOO COMPLEX!!

“As you don’t fight fire with fire you cant fight complexity with complexity”.

Complexity generates uncertainty.Behavioral finance provides us prescriptions as well as descriptions.

NON EXPERIMENTAL STUDY OF FINANCE AT INITIAL STAGES;

Few issues;

Disposition effect.Prospects theory.Failure to ignore sunk cost..

Whether humans behave less rational than lower animals?

FINANCE PROFESSIONAL V/S NOVICES.

Training .Reputation.Over confidence.More biasedMore myopic risk

aversion.Experience doesn’t

always produce expertise

SHORT TERMISIM

Long term financial consequences of different types of loans on credit repayment descions;{effect of information}

Experiment -1(provision of additional information)

Experiment-2(personal circumstances/worry)

SOME SURVEY RESULTS Personal &business relation

with management.Attitude of Turkish investors.e.g. Credit card users v/s non

users.Cognitive component.

WHY IS WORK IN BEHAVIOURAL FINANCE IS IMPORTANT?

KEEP TRACK OF INSTANCES OF YOUR OVER CONFIDENCE

RESIST NATURAL URGE TO BE OPTIMISTIC.

WHETHER YOU HAVE REAL REASONS TO BELIEVE YOU KNOW MORE THAN MARKET?

COMMUNICATES REALISTIC ODDS OF SUCCESS TO YOUR CLIENTS

ACCESS HOW RISK AVERSE YOUR CLIENT IS?

Heuristics provide effective means of making complex

descions.Knowledge of behavioral finance gives awareness about

potential biasness.

(promote market efficiency)

forecasting performance.Information dissemination.

Behavioral finance is still in early stages.Borrowing methodologies from other disciplines. why?Started as multi-disciplinary Endeavour however inter

disciplinary research has bee started now.