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Behavioral Finance
Learning Objectives
Explain Behavioral finance as
Modern Finance
Explain the Nature and Scope of
Behavioral Finance
Describe the Objectives of Behavioral
Finance
Explain the history of Behavioral
Finance
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
Ramsey (1928) was among the first to frame some models for
individuals utility as the concave function of consumption, which giving
rise to numerous of such concave functions.
Tversky and Kahneman (1981) found that, contrary to the expected
utility theory, people assign different weights to gains and losses
Kahneman and Tverksy (1979) derived the observation that the
marginal value of both gains and losses decreases with their magnitude.
Harrison and Kreps (1978) argued that some beliefs force agents to
buy stocks even though they believe stocks are already above their
fundamental value.
Two parameters, centrality and between ness are discussed by Freeman
(1977) regarding the trade of securities.
Ellsberg (1961) first identified the concept of ambiguity aversion, which
occurs when people prefer to bet on lotteries with known probabilities of
winning, rather than those with ambiguous outcome distributions.
Weak Form
available information
value
available information
predicted
Strong Form
Behavioral Finance
Standard Finance believes in existence of Rational Markets and Behavioral Finance believe in existence of irrational markets and
Rational investors
irrational Investors
Standard Finance theories rest on the assumptions that Explanations of behavioral finance are in light with the real
oversimplify the real market conditions
Standard Finance assumptions believe in idealized financial Behavioral finance assumptions believe in observed financial
behavior
behavior