Q What are errors in Bernoulli’s theory?

Limitations of Bernoulli's equation are as follows:

1. The Bernoulli equation has been derived by assuming that the velocity of every element of the liquid
across any cross-section of the pipe is uniform. Practically, it is not true. The elements of the liquid in the
innermost layer have the maximum velocity. The velocity of the liquid decreases towards the walls of
the pipe. Therefore, we should take into account the mean velocity of the liquid.

2. While deriving Bernoulli's equation, the viscous drag of the liquid has not been taken into
consideration. The viscous drag comes into play, when a liquid is in motion.

3.Bernoulli's equation has been derived on the assumption that there is no loss of energy, when a liquid
is in motion. In fact, some kinetic energy is converted into heat energy and a part of it is lost due to
shear force.

4. If the liquid is flowing along a curved path, the energy due to centrifugal force should also be taken
into consideration.

Q Explain various challenges being faced by behavioral lists

Lack of money, opportunity and resources, bias, fear, defective conduct of scientific enterprise, etc., are
proving great hurdles to the behaviouralists.
Improving Peoples’ Skills;
0 Improving Quality and Productivity;
0 Total Quality Management (TQM);
0 Managing Workforce Diversity;
0 Responding to Globalization;
0 Empowering People;
0 Coping with Temporariness;
0 Stimulating Innovation and Change

Q Discuss the concept of Behavioral Finance.

Behavioral finance is an area of study focused on how psychological influences can affect
market outcomes. Behavioral finance can be analyzed to understand different outcomes across
a variety of sectors and industries. One of the key aspects of behavioral finance studies is the
influence of psychological biases.
1. Behavioral finance can be analyzed to understand different outcomes across a variety of
sectors and industries.
2. One of the key aspects of behavioral finance studies is the influence of psychological
biases.
3. Some common behavioral financial aspects include loss aversion, consensus bias, and
familiarity tendencies.
 4. The efficient market theory which states all equities are priced fairly based on all
available public information is often debunked for not incorporating irrational emotional
behavior

Q Explain the Fundamental risk and Noise-trader risk.

Fundamental risk is risk that affects entire societies or a large population within a society.
Natural disasters, such as earthquakes and hurricanes, fall into the category of fundamental
risk, as do phenomena such as inflation and war, which typically affect large numbers of people.
Noise trader risk is the possibility that well-disciplined and knowledgeable traders can lose
money due to an excess of noise in the market. It is the risk associated with largely uninformed
traders who trade on the noise in the market instead of the signal

Q Explain the Transaction costs and short-selling costs.

Transaction costs are expenses incurred when buying or selling a good or service. Transaction
costs represent the labor required to bring a good or service to market, giving rise to entire
industries dedicated to facilitating exchanges. In a financial sense, transaction costs include
brokers' commissions and spreads, which are the differences between the price the dealer paid
for a security and the price the buyer pays.

Short selling is an investment or trading strategy that speculates on the decline in a stock or
other security ’s price. It is an advanced strategy that should only be undertaken by
experienced traders and investors. Traders may use short selling as speculation and investors or
portfolio managers may use it as a hedge against the downside risk of a long position in the
same security or a related one. Speculation carries the possibility of substantial risk and is an
advanced trading method

Q How does herding tendencies of investors affect the stock market? Explain it in details with
examples.

The term herd instinct refers to a phenomenon where people join groups and follow the actions
of others under the assumption that other individuals have already done their research. Herd
instincts are common in all aspects of society, even within the financial sector , where investors
follow what they perceive other investors are doing, rather than relying on their own analysis.
People can avoid herding by doing their own research, making their own decisions, and taking
risks.
For example The dotcom bubble of the late 1990s and early 2000s is a prime example of the
effects of herd instinct.

Q Definition of arbitrageur; Long-short trades; Risk vs. Horizon.

An arbitrageur is a type of investor who attempts to profit from market inefficiencies. These
inefficiencies can relate to any aspect of the markets, whether it is price, dividends, or
regulation. The most common form of arbitrage is price.

An arbitrage trade has two legs: one long in the market and one short in the same market, so
by being both long and short in the same market, an arbitrageur doesn’t have to have a strong
bullish or bearish inclination toward the market as a whole; he just has to believe his long
position will gain relatively more value (or lose relatively less value) than his short position. A
merger arbitrage takes advantage of market inefficiencies surrounding mergers and
acquisitions. Merger arbitrage, also known as risk arbitrage, is a subset of event-driven
investing or trading, which involves exploiting market inefficiencies before or after a merger or
acquisition

Q Why study of Behavioral finance is needed in 21st century? Explain the difference between
Standard Finance and Behavioral Finance?

Behavioral finance helps us understand how financial decisions around things like investments,
payments, risk, and personal debt, are greatly influenced by human emotion, biases, and cognitive
limitations of the mind in processing and responding to information. Behavioral finance is finance with
normal people in it, people like you and me.

Standard finance, in contrast, is finance with rational people in it. Normal people are not irrational.
Indeed, we are mostly intelligent and usually ‘normal-smart.’ But sometimes we are ‘normal-stupid,’
swayed by cognitive errors such as hindsight and overconfidence, and misleading emotions such as
exaggerated fear or unrealistic hope. Standard finance is built on four foundation block Behavioral
finance offers an alternative foundation block for each of the foundation blocks of standard finance

Q Discuss the concepts of mental accounting and mental budgeting.

Mental accounting refers to the different values a person places on the same amount of money, based
on subjective criteria, often with detrimental results. Mental accounting is a concept in the field of
behavioral economics . Developed by economist Richard H. Thaler, it contends that individuals classify
funds differently and therefore are prone to irrational decision-making in their spending and investment
behavior.

Mental budgeting focuses on the psychology involved in financial accounting. The theory of mental
budgeting argues that people set budgets and track their expenses against their set budgets (Heath,
1995). Mental budgeting is a psychological process where money is labeled for particular spending or
saving categories.

Q Describe how human mind works with the two systems.

Psychologists have been intensely interested for several decades in the two modes of thinking evoked
by the picture of the angry woman and by the multiplication problem, and have offered many labels for
them. I adopt terms originally proposed by the psychologists Keith Stanovich and Richard West, and will
refer to two systems in the mind, System 1 and System 2.
 1. System 1 operates automatically and quickly, with little or no effort and no sense of voluntary
control.
2. System 2 allocates attention to the effortful mental activities that demand it, including complex
computations.

The operations of System 2 are often associated with the subjective experience of agency,
choice, and concentration. System 1 thinking is a near-instantaneous process; it happens
automatically, intuitively, and with little effort. It's driven by instinct and our experiences.
System 2 thinking is slower and requires more effort. It is conscious and logical

Q Give a brief note on hyperbolic discounting.

Hyperbolic discounting is a psychological bias where people to prioritize immediate rewards and
satisfaction over future rewards. It's used in sales and marketing to encourage consumers to purchase
based on the short-term reward, or instant gratification. Hyperbolic discounting can result in poor
decision-making, because it incentivizes impulsivity and immediate gratification.

1 Decisions that prioritize short-term gratification often neglect and detract from our long-term well-
being. Think of smoking: there is a quick rush of dopamine that is valued over one’s future health. While
addiction often plays a role in people’s decision to smoke, nicotine addiction itself has been linked to an
undervaluation of delayed, or long-term outcomes (i.e. impulsivity)

Q Briefly discuss agency theory and agency cost.

Agency theory is an economic theory that views the firm as a set of contracts among self-interested
individuals. An agency relationship is created when a person (the principal) authorizes another person
(the agent) to act on his or her behalf.

An agency cost is an internal expense that comes from an agent taking action on behalf of a principal.
Core inefficiencies, dissatisfactions, and disruptions contribute to agency costs. Agency costs that
include fees associated with managing the needs of conflicting parties are called agency risk

Q Discuss in detail the key tenets of prospect theory. What are emotions? Discuss in detail the
theories and dimensions of emotion.

The prospect theory says that investors value gains and losses differently, placing more weight on
perceived gains versus perceived losses. An investor presented with a choice, both equal, will choose
the one presented in terms of potential gains. Prospect theory is also known as the loss-aversion theory.
Emotions are very short-lived feelings that come from a known cause. They are displayed through
sudden physical body language and facial expressions, such as by smiling when happy or crying when
sad.

Different types of emotions include: happiness, sadness, anger, fear, surprise, and disgust. Emotion is a
complex, subjective experience accompanied by biological and behavioral changes. Emotion involves
feeling, thinking, activation of the nervous system, physiological changes, and behavioral changes such
as facial expressions. Different theories exist regarding how and why people experience emotion
Q Discuss modern portfolio theory and its assumption. Also, explain the importance of MPT for risk
management.

Modern Portfolio Theory (MPT) is an investing model in which investors invest with the motive of taking
the minimum level of risk and earning the maximum amount of return for that level of acquired risk. The
modern portfolio theory is a helpful tool for the investors as it helps them in choosing the different types
of investments for the purpose of the diversification of the investment and then making one portfolio by
considering all the investments. Modern Portfolio theory has a certain assumption that is to be
considered while making any decisions in order to arrive at the conclusion that risk, return, and
diversification relationships hold true.MPT quantifies the benefits of diversification, or not putting all of
your eggs in one basket. For most investors, the risk they take when they buy a stock is that the return
will be lower than expected. In other words, it is the deviation from the average return.

Q Explain the nature, scope and applications of behavioral finance. Also, discuss the evolution of
rational markets.

Behavioral finance is an area of study focused on how psychological influences can affect market
outcomes.
Behavioral finance can be analyzed to understand different outcomes across a variety of sectors and
industries.
One of the key aspects of behavioral finance studies is the influence of psychological biases.
Some common behavioral financial aspects include loss aversion, consensus bias, and familiarity
tendencies.
The efficient market theory which states all equities are priced fairly based on all available public
information is often debunked for not incorporating irrational emotional behavior. Market evolution
refers to changes in primary demand for a product class and changes in technology. For more on
defining your market and target customers, check out How to Do Market Research, Market Research
Resources for Entrepreneurs, and How to Define Your Target Market. According to rational choice
theory, rational investors are those investors that will quickly buy any stocks that are priced too low and
short-sell any stocks that are priced too high