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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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