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Behavioral Finance
Learning Objectives
Nature
Behavioral Finance is just not a part of finance. It is something which
is much broader and wider and includes the insights from behavioral
economics, psychology and microeconomic theory.
The main theme of the traditional finance is to avoid all the possible
effects of individuals personality and mindset
Objectives
To review the debatable issues in Standard Finance and the
interest of stakeholders.
To examine the relationship between theories of Standard
Finance and Behavioral Finance.
To examine the various social responsibilities of the subject.
To discuss emerging issues in the financial world.
To discuss the development of new financial instruments
To get the feel of trend of changed events over years, across
various economies.
To examine the contagion effect of various events.
An effort towards more elaborated identification of investors
personalities.
More elaborated discussion on optimum Asset Allocation
Behavioral Finance: The Traditional View to Financial Markets
Historical Information is available Stock prices adjust all publically All information is fully reflected in
Future prices of stocks can not be available information the stock prices
predicted Few Insiders earn profits, who adjust Investors respond quickly
Technical Analysis is of little or no their decision making according to Insider information is of no value
value available information
Fundamental Analysis is of little or
no value
Behavioral Finance: Limitations of Efficient Market Hypothesis
Standard Finance believes in existence of Rational Markets and Behavioral Finance believe in existence of irrational markets and
Rational investors irrational Investors
Standard helps in building a rational portfolio Behavioral finance helps in building an optimal portfolio
Standard Finance theories rest on the assumptions that Explanations of behavioral finance are in light with the real
oversimplify the real market conditions problems associated with human psychology
Standard Finance explains how investor should behave Behavioral Finance explains how does investor behave
Standard Finance assumptions believe in idealized financial Behavioral finance assumptions believe in observed financial
behavior behavior