FIN-ELEC 2247 BEHAVIORAL FINANCE

Name: Terso P. Gregorio Jr. Date: Jan 23, 2021

Chapter Title: Chapter 6: THE ROLE OF PSYCHOLOGICAL FACTORS IN BEHAVIORAL FINANCE

CHAPTER SUMMARY NOTES

1.Introduction  Decision making is essential for every industry especially when it comes to the business
industry which includes financing decisions that need to be properly checked and
measured to avoid any losses. Thus, behavioural finance existed in the market which talks
about the psychological reason and effect of financial decision making skills. As we know,
it is very common for a business to follow various ways in order to come up with a decision.
It may either be based on the rules of thumb or it could also be a complex one.
 According to (Bikas, Jureviciene, Dubinskas, & Novickyte, 2014), one of the most important
factors of behavioural finance is the people’s reaction and perception towards something
which means that when it comes to decision making, people come up with different
decisions in one situation.
 To be able to cope up with uncertain situations, most investors choose to rely on cognitive
biases when making financial decisions (Keil, Depledge, & Rai, 2007).
• BACKGROUND  Cognitive Psychology - is defined as the study of internal mental processes in which it tackles
the things that are connected with your brain such as perception, thinking, memory etc.
 Behavioural finance models are developed to be able to explain the behaviour of the investor
or other market anomalies when there is no sufficient explanation.
 According to Belle, Raiffa and Tversky, they believe that creating a normative model of decision
making that is different to prescriptive models is a really great way to think optimal ways on
how they should come up with a financial decision.
 In 1972, Slovic was able to draw the attention of many people, especially those people who
are working in the finance about the research conducted about the behavioural decision
making skills that will benefit them as a part of the finance department.
The Role of  Theory of Behavioral Finance - The reason behind behavioural finance paradigm has
Psychological Factors resulted due to the difficulties faced by the traditional paradigm.
in Behavioral Finance  As we know, behavioural finance is only a part of finance in which the main goal of this is
to be able to understand the systematic financial market implications that are a result of
the decision making made by an individual.
 Through the financial theory that are mainly based on Modern Portfolio Theory
(Markowitz, 1952) and CAPM (Sharpe, 1964) act as the way on how academics and
practitioners analyse investment performance of the business.
 According to Shefrin in 2001, behavioural finance refers to the study of how psychology
affects financial decision making process and financial markets made by an individual for
the benefit of their business operations (Shefrin, 2001).
CONCLUSION and

IMPORTANT
TERMINOLOGIES

 There is a huge role that behavioural finance plays in the psychological factors,
thus this chapter talks about the theory of behavioural finance, the application
of behavioural finance theory, the empirical achievement in behavioural finance,
the utilization of psychological factors in behavioural finance concerning beliefs
and a lot more. Applying the psychological factors in behavioural finance will
surely improve the financial performance and the business will be able to reach
sustainable competitive advantage to other competitors.
 Behavioral Finance - Behavioral finance is an area of study focused on how
psychological influences can affect market outcomes.
 Financial Decision - Financial decisions are the decisions that managers take
with regard to the finances of a company