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Decoding Behavioral Finance – Harness its Power to Transform your Life

by Jun 4, 2017Finance

Merton Howard Miller, the great American economist who has co authored the Modigliani-Miller Theorem on Capital Structure which state that in an efficient market in the absence of bankruptcy cost , taxes, asymmetric information, firm cost the value of a firm is unaffected by how that firm is financed. However there are various factors apart from the standard elements which change the Capital Structure.

Investor Fondness for the Dividends:

In the early 1970 there was energy crisis, The Power Company Con Edison decided to eliminate its dividend with all the expert advices but the Annual General Meeting of the company in 1974 confronted with lot of chaos. The shareholders revolted, some cried few were to be restrained from manhandling the company’s chairman. Few of the senior citizens cried for being deprived of the dividend only source of their earning. The dividend riddle cannot be solved by forgetting the patterns of the shareholders behaviors. Contrary to the principles of standard Finance Principles the shareholders make important distinctions between capital and dividends.

Selling Winners and Holding Losers too Long:

Warren Buffet in his early childhood purchased 6 shares of Cities Service (Now CITGO) for $38, 3 for himself and 3 for his sister Doris. The stock price fell to $27 over 30% but he held it back but sold the share for $40 barely below 10%.This also includes the Long Term Gain taxes if selling while holding it for a year. Bill Groos,the economist says that many of the investors will not sell anything with a loss. They do not want to give up the Hope on making money on their particular investment as their mindset.

Investors prefer Stocks of Good Company:

The investor rely on the representativeness heuristic and overestimates the probability that the stock of a good company is good because a good stock is similar to good company but the standard investor will tilt their portfolio.

Is there a wide gap between rational financial/market decisions and psychology?

Behavioral Finance Homework Solution is a powerful kit for financial practitioners and investors in the realm of rational market decisions. In vicinity/ regards to Traditional Finance model, Behavioral Finance study forms a remarkable niche in the world of Finance.

A prominent catchphrase by Dalai Lama (2010) ‘Happiness is not something ready made. It comes from your own actions’.

Behavioral Forces Shape up the Financial Regulations:

The brokers use the suitability regulations as their expertise for their customers. The brokers make it sure that the stocks recommended to their customers meet the financial conditions and needs. In an arbitration decision between Charles and Schwab & company and investor who lost $500,000.Investor claiming that the stock was unsuitable for his financial condition and needs and claimed that Schwab did not give the advice. The Schwab argument in its defense that it does not give advice; it merely trades what the investors wants. The arbitration panel gave the decision n favor of the investor. It clarifies that mere the standard financial conditions cannot supersede the Behavioral Finance.

Impediments to Investing:

  1. Over- reliance on oneself:

According to human psychology people tend to have unwarranted confidence on their decision making. Researchers have proved that an individual tend to overrate their ability in decision making. This positive behavior can be valuable for personal growth but on the other hand it can hamper once investing decisions.

  1. Skill follows Luck:

Human often relate their positive result with their skill for instance, a positive outcome relates to once ability and caliber. However, a negative outcome is attributed to once bad luck or mis fortune. This biasness gets into the way of making investment decisions.

How Behavioral Finance Homework Solution can Help-

  • Helps in better understanding of basic concepts
  • Concept of value and return
  • Calculation of present and future value
  • Valuation of bonds and shares

Behavioral Finance Homework Solution explains the concept in detail.

The Standard finance is built on the arbitrage principles of Miller and Modigliani.As a descriptive theory of finance the Standard finance does not do well as a descriptive theory of finance.People in standard finance are rational.They donot know the pain of regret and they have no lapses of self control.Contrary to it the people in behavioral finance may not always be rational but they are always normal. The know the pain of regret and the difficulty of self control.The behavioral finance is built on a better model of human behavior which allows it to deal effectively with many puzzles that affected the standard finance badly.Financial professionals who understand behavioral finance will understand their own behavior and improve their decisions.The institutional investors who understand behavioral finance will understand the beliefs and motives of their clients and will be serving their clients in a better way and also will be educating them.

  • Behavioral Finance Homework Solution plays a role here. Let’s have a glance at its possible impact on the real-time world.
  • During the last decade, Behavioral Finance has succeeded in dotting its presence worldwide. It illustrates the techniques to be taken into account.
  • Irrational decisions are impediments to a dynamic financial economics.

Behavioral Finance Triad:

It encompasses 3 factors- Cognitive, sensory and emotional attributes in an individual. There is no easy access to strike the right chord of an individual’s heart and head. For that, it requires belief in you.

Homework assignment solution to the Behavioral Finance:

It is interesting to know how decision-making ethos of people has evolved with time. From a traditional finance model to Behavioral Finance Homework Solution.Studying and analysis of any sub discipline in behavioral finance can be a daunting task,which requires a greater attention to the smallest details and also needs expert assistance when it comes to behavioral finance homework help.

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