Risk in Modern Finance
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document in english
business strategy
case study
date published 27/08/2007
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level : General public
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SummaryModern finance and much of economic theory is based on the assumption that individuals that make up the marketplace in which transactions occur, act rationally and know every piece of information associated with their decision-making process in purchasing or selling a product (whether it is a stock or a banana). These assumptions are shaky and dangerous, and researchers, especially academics in the fields of finance and economics, have concluded that this is not the case. Hundreds of examples have been documented on events where irrational behavior and errors repeatedly in judgment occurred. In Against The Gods, Peter L. Bernstein states that there is proof of evidence that “reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty” (304). Are markets governed by psychology of the investors or is the market an entity of itself and makes its own decisions?
Table of Contents- The analyses of behavioral finance deal with the effects of market decisions and of the decisions of a population
- Currently there are academic experts in the field who invest their money based on behavioral financial theories
- Statman is a professor who is well-versed in the area of behavioral finance that deals with fear of regret
- If some ametuer investors accidentally have success in one of their trading endeavors, they attribute that success to skill
- People view other people's decisions as not being very thoughout or practical, but they view their own decisions as rational ones
- Is it possible to predict stock price movement through behavioral finance or are price movements too random for anyone to be able to model them?
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