1. Behavioral Finance

2. Unit 1
Syllabus:
Behavioural Finance: Nature, Scope, Objectives and Significance & Application. History of Behavioural
Finance, Psychology: Concept, Nature, Importance, The psychology of financial markets, The psychology of
investor behaviour, Behavioural Finance Market Strategies, Prospect Theory, Loss aversion theory under
Prospect Theory & mental accounting—investors Disposition effect
Course Objective
To understand the basic meaning of the subject behavioural finance
To understand the investors’ psychology
Market strategies
Theories of behavioural finance

3. Behavioral Finance: Meaning
Behavioural finance is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets.
Behavioural finance is of interest because it helps explain why and how markets might be inefficient.

4. Nature of Behavioral Finance
Most people know that emotions affect investment decisions. People in the industry commonly talk about the role greed and fear play in driving stock markets. Behavioural finance extends this analysis to the role of biases in decision making, such as the use of simple rules of thumb for making complex investment decisions.
Behavioural finance takes the insights of psychological research and applies them to financial decision

5. Nature of Behavioral Finance
Behavioural finance studies the psychology of financial decision-making.
It makes the understanding of investment decision.
It is the study of investor’s psychology.
It is analytical in nature.

6. Scope Identify Investor’s Personality Helps to identify risk
Provides explanations to various corporate activities
Enhance the skill set to investment advisors
To understand the market anamalities

7. Objective of Behavioural Finance
To study emerging issues in financial market
To understand the psychology of the investors’
To study the change in trends in investment

8. Objective of Behavioural Finance
To study the investment decision
Develop the strategy of financial decision
Study the scope of investment decision

9. Psychology
Psychology is concerned with all aspects of behaviour and with the thought, feelings, and motivation underlying that behaviour
Psychology is defined as the scientific study of human behaviour with the object of understanding why living being behave as they do.

10. Scope of Psychology Social Psychology Behavioural Psychology
Applied Psychology
Educational Psychology

11. Nature of psychology Psychology as science
Psychology as social science
Psychology as positive science
Psychology as applied science

12. Psychology of financial market
Market psychology
Boom and cycles
Psychology of investors
Psychology of the rational man

13. Psychology of investors’ behaviour
Behavioural approach
Cognitive approach
Psychoanalytic approach
Humanistic approach
Eclectic approach

14. Behavioural finance: Market strategy
Market timing
Buy and hold strategy
Technical analysis as tool
Behavioural indicators

15. Psychology of financial market:
Modern investment theory says that, at all times, market prices equal fundamental value and that asset returns in the cross-section reflect relative exposures to systematic non-diversifiable risk. Despite decades of data analysis, empirical support for this theory remains thin.

16. Prospect Theory
The theory states that people make decisions based on the potential value of losses and gains rather than the final outcome, and that people evaluate these losses and gains using certain heuristics.
The foundation of prospect theory is that investors are much more distressed by prospective losses than they are happy about prospective gains.

17. Loss aversion theory
In economics and decision theory, loss aversion refers to people's tendency to strongly prefer avoiding losses to acquiring gains.
Most studies suggest that losses are twice as powerful, psychologically, as gains.
This leads to risk aversion when people evaluate an outcome comprising similar gains and losses; since people prefer avoiding losses to making gains.

18. Mental Accounting
Mental accounting theory, framing means that the way a person subjectively frames a transaction in their mind will determine the utility they receive or expect.
It is a tendency of the brain to create short cuts with how it perceived the information and ending up with outcomes that is difficult to be viewed in any other way. The results of these mental accounting are that it influence decisions in unexpected ways

19. Investors’ Disposition Effect
The disposition effect is an anomaly discovered in behavioral finance. It relates to the tendency of investors to sell shares whose price has increased, while keeping assets that have dropped in value.

20. Investors’ Disposition Effect
Investors are less willing to recognize losses (which they would be forced to do if they sold assets which had fallen in value), but are more willing to recognize gains. This is irrational behavior, as the future performance of equity is unrelated to its purchase price.