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Topic:
Behavioral FinanceExternal Factors and Investors Behavior, Behavioral corporate Finance.
External Factors
In the external factors of behavioral finance that influence Investor behavior and external environment are as follows:
1.Family Life:
Depends on Family preferences, choices. perception and Income category.
2.Business Relationships:
Partnership with another business.
3. Economic Conditions:
4.Regulatory Changes: Any changes in the corporate laws, rules and regulations. 5.Political Environment: A change of the government or policy has a direct impact on the economic scenario. 6. Technological change. 7.Social Environment. 8. Competition.
Investor Behavior
An individual who commits money to investment products with the expectation of financial return. Generally, the primary concern of an investor is to minimize risk while maximizing return, as opposed to a speculator, who is willing to accept a higher level of risk in the hopes of collecting higher-than-average profits.
Rational thinking can lead to irrational decisions in a misperceived or misunderstood context. In addition, biases can cause people to emphasize or discount information, or can lead to too strong an attachment to an idea or an inability to recognize an opportunity.
Biases One kind of investor behavior that leads to unexpected decisions is bias, a predisposition to a view that inhibits objective thinking. Biases that can affect investment decisions are the following: 1.Availability. Rely on information to make informed decisions. Tend to give more weight to more available information. 2.Representativeness. Tendency to be more optimistic about investments. Much emphasis on past performance and not enough on future prospects. 3.Overconfidence. Too much faith in the precision of your estimates. Underestimate the extent of possible losses. Investment risks.
4.Anchoring.
Cannot integrate new information into Investor thinking because you are too anchored to their existing views.
5.Ambiguity aversion
The tendency to prefer the familiar to the unfamiliar . or the known to the unknown. Bias against uncertainty may create an opportunity cost for your portfolio. Availability bias and ambiguity aversion can also result in a failure to diversify, as investors tend to stick with what they know.
Investor Profiles
An investor profile expresses a combination of characteristics based on personality traits, life stage, sources of wealth, and other factors. What is your investor profile? The better you can know yourself as an investor, the better investment decisions you can make.
Researchers have identified some features or characteristics of investors that seem to lead to recognizable tendencies. For example, stages of life have an effect on goals, views, and decisions, as shown in the examples in Life Stage Profiles.
Ages
25-40
Investment goals
Eliminating Debt.
Spending
65-80
Relying on retirement income. Reducing investment risks. Preserving value, preserving or reinvesting capital.
Gifting
80+
Eliminating risk
Distributing wealth.
Behavioral corporate finance is the study of how owners and managers of publicly-traded companies make decisions that affect the values of those companies. It offers a way to understand how decisions are made in corporate finance, reflecting the reality that markets are not always efficient.
What is the Behavior Gap? There is a gap between the rate of returns that are earned in the markets when an investor builds a diversified portfolio . and the rate of returns earned by investors who move their money around in an emotional response to what is happening in the markets.
Behavioral gap may be deficit or surplus. Surplus= E (R) > Required rate of return. Deficit= E(R) < Required rate of return.
Financial mistakes by following a disciplined approach to investing. Having a logical process you use to make financial decisions. Avoid making emotional decisions about money and investing.
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