Psychology of investors for investment

1. BEHAVIOURIAL
FINANCE
PRESENTED BY
SIMRAN KAUR
MBA 2ND YEAR

2. INTRODUCTION TO BEHAVORIAL
FINANCE
 A theory of finance that attempts to explain the decisions of investor
by viewing them as rational actors looking out for their self-
interest, given the sometimes inefficient nature of the market.
 Combine behavioral and cognitive psychological theory with conventional
economics and finance to provide explanations for why people make
irrational financial decisions.
 Combines social and psychological theory with financial theory as a means
of understanding how price movements in the securities markets occur
independent of any corporate actions.

3. NATURE OF BEHAVORIAL FINANCE
 Bridge gap between finance and psychology
 Two types:
1. Rational finance paradigm
2. Irrational finance paradigm
 Rational finance paradigm: investors act rationally and consider all
available information in decision-making process
 Irrational finance paradigm: behavior of an individual is determined by
own mind
 Stimulating field of scholarship

4. SCOPE OF BEHAVORIAL FINANCE
 Inflation and stock market
 Underpricing of Initial Public Offering
 Investors
 Corporations
 Markets
 Regulations
 Education

5. OBJECTIVES OF BEHAVORIAL FINANCE
 Correct decision making
 Provide knowledge to unaware investors
 Identifies emotions and mental errors
 Delivering what the client expects
 Ensuring mutual benefits
 Maintaining a consistent approach
 Examining a consistent approach

6. SIGNIFICANCE OF BEHAVORIAL
FINANCE
 Determining goals of investors
 Defines investors’ biases
 Manages behavioural biases
 Helps in investment decisions
 Helps for financial advisors’ and fund managers
 Signifies that investors are emotional

7. MARKET STRATEGIES
 Market timing
 Technical analysis
 Financial fraud
 Pyramid scheme
 Efficient market hypothesis

8. PROSPECT THEORY
 Developed by Kahneman and Tversky in 1979
 Shows how people manage risk and uncertainty
 Most central element of prospect theory is S-shaped value function
Value
GainLoss

9. LOSS AVERSION THEORY
 People weigh all potential gains and losses in relation to some benchmark
reference point
 Depicts tendency of people to show greater sensitivity to losses than gains
 Types
1. Loss on the basis of “valence” or desirability
2. Loss on the basis of changes in possession

10. MENTAL ACCOUNTING
 People’s tendency to code, categorise and evaluate economic outcomes
 Primary reason is to enhance our understanding of the psychology of
choice
 3 components
1. Perception of outcomes and the making and evaluation of decisions
2. Assignment of activities to specific accounts
3. Determination of time periods to which different mental accounts relates

11. INVESTORS DISPOSITION EFFECT
 Disposition effect: notion of framing to the realization of losses
 Refer to asymmetric risk aversion, according to which investors are risk-
averse when faced with gains and risk-seeking when faced with losses

12. CONCEPT OF PSYCHOLOGY
 Behaviour
 Personality
 Motivation
 intelligence

13. NATURE OF PSYCHOLOGY
 Study of experience
 Study of mental processes
 Study of behaviour

14. IMPORTANCE OF PSYCHOLOGY
 Helps to identify goals
 Helps to understand the investors attitude
 Helpful in decision making
 Helps to identify the financial market environment

15. PSYCHOLOGY OF FINANCIAL
MARKETS
 Offers an understanding of financial market process which goes beyond
cognitive aspects alone
 Provides insights into the connection between the subjective experience of
market participants and objective market processes
 Offers insight into the difference between market participants

16. PSYCHOLOGY OF INVESTOR
BEHAVIOR
 Incorporates both quantitative and qualitative aspect
 Examines the mental processes and emotional issues
 Different biases
1. Familiarity bias
2. Self-attribution bias
3. Trend-chasing bias
4. Behavorial bias

17. THANK YOU!!!