behavioral finance - an explanation
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Assumption of Assumption of BehaviouralBehavioural InvestorsInvestors
Traditional FinanceTraditional Finance Behavioural FinanceBehavioural Finance
Rational & CorrectRational & Correct Heuristic (Rule of Thumb)Heuristic (Rule of Thumb)Price reflects intrinsic valuePrice reflects intrinsic value Frame dependence, socialFrame dependence, social
influence causes Mispricinginfluence causes Mispricing
Risk & ReturnRisk & Return primeprime
factors for investors Decisionfactors for investors Decision
Risk & ReturnRisk & Return framesframes
Specific.Specific.Rational, Logical,Rational, Logical,Transparent & ObjectiveTransparent & Objective
Herd instinct, Emotional andHerd instinct, Emotional andSentimental.Sentimental.
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Arguments in favour of Behavioral Arguments in favour of BehavioralFinanceFinance
More RealisticMore RealisticPsychological FoundationPsychological FoundationIncreases Explanatory Power of Financial ModelsIncreases Explanatory Power of Financial ModelsSolves Empirical Puzzles of Traditional FinanceSolves Empirical Puzzles of Traditional Finance
New approach to Traditional Finance New approach to Traditional Finance
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Basics of Theories of Behavioral FinanceBasics of Theories of Behavioral Finance
HeuristicHeuristic Driven BiasesDriven BiasesFrame DependenceFrame Dependence
Emotional InefficienciesEmotional Inefficiencies
Market InefficienciesMarket Inefficiencies
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H euristicH euristic Driven BiasesDriven BiasesItIt explains,explains, howhow decisiondecision makersmakers taketake decisiondecision
withoutwithout systematicsystematic collectioncollection andand evaluationevaluation of of informationinformation inin thethe eventevent of of limitedlimited timetime
RepresentativenessRepresentativenessOver Over ConfidenceConfidenceAnchoringAnchoringGamblers FallacyGamblers FallacyAvailability BiasesAvailability BiasesAversion to AmbiguityAversion to Ambiguity
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Frame DependenceFrame DependenceProspect TheoryProspect TheoryMental AccountingMental AccountingNarrow FramingNarrow FramingShadow of PastShadow of PastBehavioural PortfolioBehavioural Portfolio
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P rospect TheoriesP rospect Theories
InvestorsInvestors paypay attentionattention toto changechange inin eacheachtransactiontransaction thanthan thethe totaltotal valuevalue. .
PeoplePeople look look atat chanceschances inin termsterms of of potentialpotential gaingain
andand losseslosses inin relationrelation toto specificspecific referencereference pointpoint(Purchasing(Purchasing Power)Power). .
UnderweighingUnderweighing outcomesoutcomes thatthat areare probable,probable, inincomparisonscomparisons to to certaincertain outcomesoutcomes. .
ValueValue functionfunction concaveconcave forfor gainsgains andand convexconvex forforlosseslosses..
MoreMore painpain forfor losseslosses lessless happinesshappiness inin gainsgains. .
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S hadow of P astS hadow of P astG ain prompts people to take more risk Loss MakesG ain prompts people to take more risk Loss Makes
people averse to take further risk people averse to take further risk ..
Behavioral portfolioBehavioral portfolioInvestorsInvestors toto holdhold theirtheir portfolioportfolio inin aa pyramidpyramid of of
assetsassets basedbased onon thethe goalsgoals likelike safety,safety, incomeincome andandgrowthgrowth. .
OptionsOptionsCommercial PropertyCommercial Property
StocksStocksBondsBondsResidential HouseResidential HouseCashCash
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M arket InefficiencyM arket Inefficiency
InvestorsInvestors tradetrade onon thethe basisbasis of of rumors,rumors,sentimentsentiment oror noisenoise notnot onon fundamentalsfundamentals. .
Buying Undervalued stocksBuying Undervalued stocks - - more riskymore risky
Not Selling Over priced stocksNot Selling Over priced stocks - - moremoregreedygreedy
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