Traditional financial and economic theories stipulate that the main aim of an investor is wealth maximization. One of the greatest limitations of the conventional financial and economic theories is the failure to consider emotions and psychology of the investor. Behavioral finance is a new area in finance that considers the psychology behind a financial decision. Behavioral finance identifies the fact that investors are subject to emotional bias, thus influencing rational decision making. Are you looking for behavioral finance assignment help? Meet our team of finance professionals who will provide you with do my finance homework at a very affordable price.
Behavioral finance has gained much focus over recent years in academics. Business management, corporate finance and economics students have to undertake this course to help them understand the process of rational decision making. We provide our clients with quality behavioral finance assignment help to ensure that they attain better grades with ease. Our services are of high quality, original and handled with professionals with hands on experience.
Behavioral biases that influence decision making
Documented psychological research has shown that human bias affect the process of decision making. Bias or preconception affects the normal decision making thus influencing the attainment of the objective under consideration. It relates to unique individual way of processing information to reach at a decision while considering personal preferences. Biases affect all decisions; including financial and investment decisions. Some bias may be useful to arrive at certain decisions while others may contradict attainment of a goal. According to ScienceDirect, behavioral finance stands on two building blocks which includes; cognitive psychology i.e. how people think and also limits to arbitrage i.e. time when market will be inefficient. Behavioral finance can help to unravel various empirical patterns e.g. one exhibited by the stock market bubbles experienced in US and Japan.
Common behavioral biases that influence rational financial and economic decisions include:
Overconfidence refers to an individual perception of greater ability than the actual ability. The overconfidence bias results to a psychological state of mind that one can achieve greater things in future. It has a direct impact in financial investment and decision making. Overconfident investor overestimates his/her ability to identify the right opportunity. They tend to practice excessive control over the business and avoid diversification of investment portfolio. This overconfidence leads to overestimation of ability and accuracy of information at hand.
Anchoring is a cognitive condition that makes an individual to rely heavily on initial information acquired in making decisions. In decision making, anchoring occurs when an individual uses first impression to make subsequent decisions while disregarding other underlying facts. Investors with anchoring bias tend to look for financial information that is in line with his initial perception. This investor will try to avoid investment ideas and information that contradicts to his initially held perception.
Mental accounting is the mental process of creating different pools of money and allocating our income to it. This type of accounting tries to segregate our wealth depending on the amount of income and time frame or life expectation like owning a house, car and retirement. Mental accounting is illogical thinking since it tends to focus on individual well being while avoiding the concept of investing and risk taking. This type of accounting affects the manner of investor decision making since the investor tends to develop emotional attachments with certain investment priorities.
Familiarity bias occurs when an investor tends to stick to the existing business despite existence of room and opportunity for diversification. The investor instead prefers to invest in familiar assets in most cases associated with low risks and certain returns. Most investors tend to shy away from international markets and concentrate only with domestic market due to lack of information and the fear of the unknown. What investors fail to notice is that familiarity with a given investment is not a substitute to portfolio diversification.
It is human nature to make decisions that will avoid emotional pain in case of uncertain event. Man likes to maintain a state of inertia where the emotional security is certain. The human nature to avoid regret drives one to make biased financial planning and investments. This in return blocks people from realizing full financial potential if they had considered professional financial planning and savings.
Avoiding behavioral biases and misconceptions
In order to avoid behavioral bias, a detailed analysis of the investor decisions is necessary in order to understand the areas of weakness. A financial planner with prove useful in the process of detaching emotions from business and develop a professional and strategic investment plan. Some tactics for instance risk mitigation and systematic asset allocation in the money market will be useful to diversification of investment portfolio.
Behavioral finance assignment help
Behavioral finance is a modern and interesting perspective that tries to view the emotional weaknesses of investors that impact negatively on decision making process. We are dedicated at providing quality and timely behavioral finance assignment help to learners that have limited background knowledge in this new business finance and economics field. With years of practicing and academic experience our experts are well equipped with the right knowledge on every aspect of behavioral finance.