Behavioural finance theory is a sub-disciplinary field of economics that tries to explain the stock-market anomalies by taking into consideration the information structure and characteristics of market participants which influence their decision-making processes. It draws heavily from psychology, cognitive sciences and behavioural theories in explaining why market participants make mistakes in their investing decisions despite being rational economic agents. Behavioural theories have gained much importance in recent years in American academia. Students of management, mainstream economics, corporate finance and statistics have to write behavioural finance assignment and in such situation behavioural finance assignment help is needed.
What do behavioural finance theories explain?
Conventional behavioural finance theories define economic agents (for instance humans) as rational subjects. As such traditional behavioural financial theories like Capital Asset Pricing Model (CAPM) and Efficient Market Hypothesis (EMH) which take human being as ideal rational subjects showing perfect rational behaviour in ideal market conditions, cannot explain stock market anomalies. Some of the behavioural theories related to stock market are, the January effect (stocks that underperformed in previous financial quarters tend to outperform in January), low book value (stocks with below average prices tend to outperform higher ones), Dogs of the Dow (investing on 10 of the most popular stocks of Dow Jones) and stock herding (buying stocks in bulk based on market popularity rather than individual thinking). All these are basically investing strategies tested while writing behavioural finance assignment.
Unlike conventional finance, behavioural finance theories try to explain such phenomenon by taking into account insights borrowed from cognitive sciences and psychology. If you are stuck with your behavioural finance assignment then read through the main research areas carefully in order to get behavioural financeassignment help.
What are the major research areas of behavioural finance theories?
Behavioural finance theories typically deal with a number of human behavioural patterns related to consumer purchases and market driven investments. Some of the major behavioural finance theories are:
- Stock Market Behaviour: Some of the key investment strategies are addressed by behavioural finance theories. While studying behavioural finance theories, you realize the ups and downs of stock market. Similarly, seemingly irrational behaviour finance theories relating to retention and possession of stocks are also addressed in behavioural finance assignment One such phenomenon is ‘bird in the bush’ paradox which refers to the asymmetry between decisions to acquire new resources and keeping the older ones. Another famous behavioural finance theory that is needed to write behavioural finance assignment is ‘loss aversion’ i.e. aversion to let go of stocks even if they bring very little profits. Finally, perhaps one of the most interesting behavioural finance theories is the ‘equity premium puzzle’ which is based on the historical observation that people tend to invest more on the risky private stocks than on the relatively risk free governmental bonds. This concept is vitally important for behavioural finance assignment writing.
- Quantitative Financial Analysis: Another important area in behavioural finance assignment writing is using quantitative methods to analyse behavioural finance theories.
- Game Theory: This behavioural finance theory uses mathematical models to define strategies of cooperation and conflict between rational decision-makers in zero sum games. Students needing behavioural finance assignment help should try to have a good grasp of all the behavioural finance theories including behavioural finance game theory.
- Evolutionary Economics: Another major area of behavioural finance theory where students often face questions in their behavioural finance assignments is evolutionary economics. Behavioural finance theory uses perspectives from evolutionary biology to explain limitations of rational economic theories related to behavioural finance theories. While writing, behavioural finance assignment takes into account changes in the economic processes and institutions and uses the methodology of evolutionary biology pioneered by Charles Darwin to explain the changes from within.
What are the major points of criticism of behavioural finance theories?
As a student needing behavioural finance assignment help on behavioural finance theories, it is imperative that you should be well aware of the complications of writing behavioural finance assignment. Despite the academic success in behavioural finance assignment writing, behavioural finance theories have garnered much criticism from traditional economists. The main points of criticism can be summarized under the following heads:
- ‘Ghettoization’ of the discipline: Although behavioural finance theory borrows heavily from cognitive sciences, psychology and economics, these behavioural finance theories are tested while writing behavioural finance assignment in other academic disciplines like political science, sociology and anthropology. As such critics believe that these behavioural finance theories needed for behavioural finance assignment might lead to the increasing ‘ghettoization’ or isolation of the discipline. This, despite the fact that much of the discipline is heavily dependent on the works of social psychologists like Daniel Kahneman, Amos Tversky and political scientists like Herb Simon. Critics suggest that opening up to other disciplines will help behavioural finance theories to be more interdisciplinary and interesting to write behavioural finance assignment.
- Ignoring rationality: When you write a behavioural finance assignment the biggest point of criticism against behavioural finance theory should be discussed. Behavioural finance theory includes that human are essentially rational being making choices in order to satisfy the goal of self-maximisation. However, behavioural finance theories completely ignore this point, choosing instead to harp upon moments of failure of rational behaviour. These points are vitally important for behavioural finance assignment
- Individualist in nature: These behavioural finance theories explain individual decisions but fail to account collective decisions and outcomes. Individual choices, say critics, are influenced by society and the community. Behavioural finance assignment writing takes into account the social forces that influence individual decisions. For instance, it has been shown that many people invest on certain stocks and bonds based on recommendations of friends and neighbours. Students find difficulties with this behavioural finance theory so our behavioural finance assignment help expert provide finance homework help.
- Limited areas of research: The field of research of behavioural finance theory is extremely limited in nature. It is overwhelmingly concerned with those moments where human cognition and calculation fails. Failure of rational behaviour interacts with a host of other social and psychological factors: emotions, status competition etc. Students should take expert behavioural finance assignment help while writing behavioural finance assignments on behavioural finance theories.
- Failure to explain aggregate outcome: While behavioural finance assignment theory is good at explaining individual outcomes, but these behavioural finance theories fail to explain whether these individual outcomes add up to an aggregate social outcome unlike other branches of social sciences like economics, social anthropology and political science. Thus, these behavioural finance theories cannot explain for instance, the phenomenon where large number of people falls prey to ‘hot hand fallacy’behavioural financeassignment help on behavioural finance theories or on any of the allied disciplines of economics, political science and anthropology, you can now consult the behavioural finance assignment h (a fallacious belief that a person who has experienced some success in some random event will experience the same on additional attempts) or ‘availability biases’ (giving preference to recently observed phenomenon than past events). As a finance student, you need to imply these ideas in behavioural finance assignment
Despite such criticisms, there is no doubt that behavioural finance theory has shown much promise in explaining market anomalies. However, behavioural finance assignmentwriting needs to takes into account perspectives from allied disciplines, becomes less individualistic and more social. Our behavioural finance writing assignment help aid you with your essays, dissertations and any kinds of homework behavioural finance assignment help.
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Behavioral finance is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets. Behavioral finance is of interest to value investors because it helps explain why and how markets might be inefficient. In addition, the study of behavioral finance helps investors understand how the mind can help or hinder investment success.
Many behavioral biases are ingrained aspects of human decision-making processes, which have served us well as ways of coping with day-to-day choices. But, are unhelpful for achieving success in long-term activities such as investing.
Only by understanding the biases and their effect, are we able to avoid major pitfalls and achieve a better understanding of financial market behavior.
“Traditional vs. behavioral finance
Over the past fifty years established finance theory has assumed that investors have little difficulty making financial decisions and are well-informed, careful and consistent. The traditional theory holds that investors are not confused by how information is presented to them and not swayed by their emotions. But clearly reality does not match these assumptions.
Behavioral finance has been growing over the last twenty years specifically because of the observation that investors rarely behave according to the assumptions made in traditional finance theory.
Behavioral researchers have taken the view that finance theory should take account of observed human behavior. They use research from psychology to develop an understanding of financial decision making and create the discipline of behavioral finance. This guide summarizes the findings of these ground-breaking financial theorists and researchers.”
“We cannot cure the biases, but we can attempt to mitigate their effects. Using techniques such as feedback, audit trails for decisions, checklists, and ‘devil’s advocates’ can help us take decisions in a more rational manner and improve the chances of investment success.”
“Understanding our brains
One emerging strand of research is the field of neuroeconomics. Medical imaging technology now allows us to look at brain activity as decisions are being made. This helps us to understand the nature and reasons for certain behavioral biases. A recent study demonstrated that individuals with brain lesions that impaired emotional decision-making were more likely to behave as rational investors than individuals with normal brains. (Source.) Other imaging studies have confirmed that the rational parts of our brain are in tension with the emotional or limbic sections of our brain. This line of enquiry offers the possibility of understanding and improving decision making.”