Behavioural Finance Assignment: A Rhetorical Précis on Financial Management
Task: Behavioural finance seeks to explain financial phenomena based on non-rational behaviour amongst investors. Discuss the critical literature in this field using relevant and recent authoritative sources and assess how behavioural finance can be applied in the context of corporate finance i.e. in linking the behavioural characteristics of top executives and their decision-making.
- You are required to write a behavioural finance assignment on rhetorical precis of no less than 700 and no more than 1000 words (not including bibliography).
- You must have used exactly eight sources of published literary sources.
- The tutor will provide three out of the eight sources.
- You are required to obtain five of the required eight sources independently
Introduction to a precis
In the journal named “Behavioural mediators of financial decision-making-a state-of-art literature review”, Nigam et al., (2018) considered herein behavioural finance assignment assessed the specific models and theories of traditional and modern times that provided the features of establishing financial behaviour among the individual investors. The journal has been used to specify the features of the work of finance and its activities that possess certain benefits upon being applied. The journal also included the relevant data and features of behavioural finance for explaining the finance-related activities linked to non-rational behaviour within the investors.
In the journal, Nigam et al., (2018) opined that the studies of behavioural finance have been able to highlight and clarify the behavioural variables providing help to make finance-related decisions in a well-planned way. The journal also threw light upon developing the reasons of decision making among the market investors who exist. The stocks of market and the market bubbles were covered and they impacted the making of decisions by the investors for designing the finance related behaviour. The behaviour of the investors have been treated to be normal under the traditional finance theory. The concept related to bounded rationality referred to the fact that the cognitive abilities of the individuals were finite and had limits pertaining to possessing concept related skills.
Traditional and behavioural finance theories had their differences upon being applied. According to Nigam et al., (2018), traditional finance theory identified that the different investors possessed the self-control and the rationality within making decisions; however, behavioural finance highlighted the fact that the individual investors were impacted by certain errors associated with their cognitive ability to make decisions. This led them to make mistakes while making finance related decisions. The hypotheses related to establishing efficiency in markets have been contradicted by applying arguments falling under the purview of behavioural finance (Mindra and Moya 2017).
Kapoor and Prosad (2017) in their journal “Behavioural finance: A review. Procedia computer science” developed and discussed about the traits of expected utility theory and its features were included under the traditional approach and its features being designed for demonstrating the significance of the finance-related behaviour of the individuals. Markowitz's portfolio theory and its features formed one of the highest quality CAPM models which were designed in a specific way for explaining the financial decisions being made. The theories of asset pricing also can be explained by aligning the well-defined assumptions being linked to the market and the operations being executed.
Sentence 2 The disruption that exists in the stock markets could not be explained by the traditional theories providing ideas about financial behaviour. The anomalies in the stock market arose from frequent disruptions taking place within the bubble zones. The journal “Investor Psychology and Behavioural Finance” written by Gupta (2019), included the indisruptions that arose all of a sudden due to overreactions in the market. By applying the features of behavioural finance theory, the behaviour of the investors have been treated to be normal and not as rational. The investors have certain limits or regulations related to controlling themselves. The cognitive errors committed by the investors can lead them to make non-rational and wrong decisions.
The journal named “Influence of behavioural factors affecting investment decision” by Antony and Joseph (2017) mentioned the financial biases among the individual investors were also explained for developing ideas about the financial decisions they would be taking in the social circle. The biases of the individual investors act as an influence for them to take decisions related to finance. The suboptimal decisions were taken by the investors. The effect of miscellaneous market bubbles such as the inclusion of the wide range of technology-related innovations and numerous risks being highlighted were mentioned and their positive influence upon developing the financial behaviour among the individuals was explained (Virigineni and Rao 2017).
Valaskova et al., (2019) opined in the journal “Behavioural aspects of the financial decision-making” that exuberant investors provide the support to enhance the values of financial assets behind the financial irregularities that exist in the market. The emotional element influences the investors to make decisions according to their mood and temperament. According to Dittenhofer A (2001), the management accounting systems operated by the inclusion of users and customers so, it had to be set up in a perfectly planned way to highlight the decision making of the management accountants who operate in the financial organisations. The financial information that was governed by the managers was different in case of public and private sector organisations. The adverse reactions of the government groups were influenced by the user information that was processed. The goals of the organisations and the participant’s behaviour helped the investors to make suitable financial decisions.
The journal included the features of normative theory of finance has helped in developing a logic for establishing appropriate information and framing structures of decision making. This helps in managing corporate planning activities by the appropriate use of the finances. In the specific journal “How behavioural biases affect finance professionals”, Baker et al., (2017), the biases found within the behaviour of the individual consumers have an influence upon the investors to make decisions. The behavioural finance aspects could be linked to the errors and biases of decision making. According to Funkhouser (2019), self-deception affects the decision making of the investors as it makes such individuals think that they know much more than they really do and that leads them to make a non-rational and wrong decision. Heuristic simplification is another bias that leads the investors to make wrong decisions due to getting access to wrongly processed information.
A Precis Conclusion
The short precis related to establishing the financial features developed the financial behaviour among the individuals who lived in the market. The relevant sources being used had helped in demonstrating the reason behind the adoption of certain behavioural traits of the individuals. The journals also included the financial management of the professionals who worked in governmental offices. Moreover, the quality strategies were included to design and develop the financial behaviour in a planned way. The normative theories of developing the appropriate financial behaviour for making decisions was developed. The features of the traditional approach of determining financial behaviour and the features of modernised approach of financial behaviour were developed within the journals and analysed.
Antony, A. and Joseph, A.I., 2017. Influence of behavioural factors affecting investment decision—An AHP analysis. Metamorphosis, 16(2), pp.107-114.
Baker, H.K., Filbeck, G. and Ricciardi, V., 2017. How behavioural biases affect finance professionals. The European Financial Review, pp.25-29.
Dittenhofer A. Mortimer., 2001. Behavioural Aspects of Government financial management. Managing Auditing Journal, 16/8 , pp.451-457
Gupta, C., 2019. Investor Psychology and Behavioural Finance. Available at SSRN 3432901.
Kapoor, S. and Prosad, J.M., 2017. Behavioural finance: A review. Procedia computer science, 122, pp.50-54.
Nigam, R.M., Srivastava, S. and Banwet, D.K., 2018. Behavioral mediators of financial decision making–a state-of-art literature review. Review of Behavioral Finance.
Valaskova, K., Bartosova, V. and Kubala, P., 2019. Behavioural aspects of the financial decision-making. Organizacija, 52(1).
Virigineni, M. and Rao, M.B., 2017. Contemporary developments in behavioural finance. International Journal of Economics and Financial Issues, 7(1).
Funkhouser, E., 2019. Self-deception. Routledge.