Friday, May 15, 2020

Finance In Investment Example For Free - Free Essay Example

Sample details Pages: 7 Words: 2085 Downloads: 1 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Level High school Topics: Investment Essay Did you like this example? 1. You have been offered the following two choicesChoice A:  £10,000 for certain; Choice B:  £20,000 with a 50% chance of occurring,  £0 with a 50% chance of occurring. Using behavioural finance, discuss and justify the choice that the majority of people would choose (i.e. choice A) 2. Outline the literature on Behavioural Finance to CRITICALLY EVALUATE whether such an assumption of rationality can be made. 3.Various theories exist to explain why long periods of growth in the price of shares are followed by sudden falls or market crashes. Evaluate the relevance of behavioural finance theory to the build up to the Dot.com bubble in 2000 and the subsequent market crash. In this essay I will be talking about behavioural finance and its increased popularity in recent academic literature. First I will give a brief description of what behavioural finance is. Basically behavioural finance is the study and theory that looks into why investors sometimes choose to ignore more traditional investment theory, such as the Efficient Market Hypothesis (EMH), and invest into projects that do not look economically sound or do not offer the most attractive returns. Behavioural finance attempts to incorporate elements of psychology into finance to better understand investor behaviour. Essentially, behavioural finance operates under the assumption that all investors are not rational. A good quote to sum up behavioural finance is provided by Shleifer (2000) who observes that, à ¢Ã¢â€š ¬Ã‹Å"at the most general level, behavioural finance is the study of human fallibility in competitive markets.à ¢Ã¢â€š ¬Ã¢â€ž ¢ In this section I will attempt to explain why most investors would choose option A, as set out in the above question. I will also attempt to explain why some investors would not follow others and opt for option B. The main reason why many people will undertake option A is simply because it is the most rational choice to make. Taking this choice will guarantee the investor a return of  £10000. This is consistent with much of the traditional market theory. The assumption of investor rationality is essential to all the main market investment theories such as the Efficient Market Hypothesis (EMH) and the Arbitrage Pricing Theory (APT). Without this assumption the models would collapse. Another reason why most investors will take option A is the absence of risk. It is 100% certain that the investor will get a  £10000 return. Again, this is consistent with traditional market theory that states that investors will favour projects with the least amount of risk if the projects being considered all return the same amount of money. Another reason why most investors will choose option A is that concerning herd mentality. Many authors have observed that some investors will simply invest in a project because that is what everyone else is doing. This leads to the assum ption that these investors are not rational as none of the market data or theory is being considered in their investment decision. This leads into the area of behavioural finance to try to explain the actions of these investors. I will now discuss why some investors choose option B. If all investors were rational then every investor would choose option A and they would choose it for the correct reasons. However, as I have already mentioned, not all investors are rational. This is the main reason for some investors choosing option B. It is also the main assumption behind the notion of behavioural finance. There are many reasons why an investor might not behave rationally and all these reasons are the basis of behavioural finance. One reason for the irrational behaviour of some investors could be due to their own personal risk attitude. Some investors could have a risk-loving attitude to risk meaning that they go for risky options regardless of the danger. This goes against trad itional theory, which states that investors are risk averse. The investors go for the more risky option because of the possibility of more money. This leads to another reason for irrationality; greed. Another reason for the irrational behaviour is that of the notion of à ¢Ã¢â€š ¬Ã‹Å"herd mentalityà ¢Ã¢â€š ¬Ã¢â€ž ¢. Many investors will invest purely because they think that others are investing there so it must be a good idea. Other reasons for the irrational behaviour of the investor are that of over confidence, regret, misinformed, etc. All these reasons will alter the mental state of the investor causing him or her to make investment decisions that are not inline with traditional theory and that could prove to be the incorrect decision. As observed by Shleifer (2000) à ¢Ã¢â€š ¬Ã‹Å"At the most general level, behavioural finance is the study of human fallibility in competitive markets.à ¢Ã¢â€š ¬Ã¢â€ž ¢ Behavioural finance incorporates elements of cognitive psychology int o finance in an effort to better understand how individuals and entire markets respond to different circumstances. Behavioural finance is based on the principle that all investors are not rational. Some investors can be over-confident, while other less knowledgeable investors might be prone to herding effects. Shefrin (1999) was one such author to talk about behavioural finance. He is one author who argues that à ¢Ã¢â€š ¬Ã‹Å"a few psychological phenomena pervade the entire landscape of finance.à ¢Ã¢â€š ¬Ã¢â€ž ¢ Harrington (2003) agrees with the notion that overconfidence can lead to irrational behaviour. She states that à ¢Ã¢â€š ¬Ã‹Å"investors can become irrational and their irrational behaviour affects their ability to profit from owning stocks and bonds.à ¢Ã¢â€š ¬Ã¢â€ž ¢ Of course, behavioural finance does have its drawbacks. One of which is the fact that using instincts alone can result in a loss. This is due to human error. The person that is using their instincts in dete rmining where to invest might not have the greatest financial knowledge in the first place. Also, this person might be having a bad day or be under a great deal of stress or be distracted in some other way. This could result in the wrong decision being made. Therefore, it is a good idea to use behavioural finance on top of the more traditional theories already in use today. This view is supported by an article by Malkiel (1989) who agrees with the notion that behavioural aspects have a great importance in stock market valuation. He argues that behavioural factors play an important role in stock valuation alongside traditional valuation theories. This is summed up by the following quote, à ¢Ã¢â€š ¬Ã‹Å"market valuations rest on both logical and psychological factors. The theory of valuation depends on the projection of a long-term stream of dividends whose growth rate is extraordinarily difficult to estimate. Moreover, the appropriate risk premiums for common equities are changeable and far from obvious either to investors or economists. Thus, there is room for the hopes, fears, and favourite fashions of market participants to play a role in the valuation process.à ¢Ã¢â€š ¬Ã¢â€ž ¢ Another article from the Banker (2004) also supports the view that behavioural finance has a role to play alongside the traditional views. Other authors talk about some of the factors that cause investors to become irrational. On such author are Johnsson, Lindblom and Platan (2002). In their masters dissertation they talk about the various factors of irrationality. One of these is the observation that investors will hang on to losing shares longer than market theory dictates. They say that this is because they are waiting for the performance of the share to change for the better. This is referred to as loss aversion. This is an example of a psychological factor that is effecting the investment decision. Another psychological factor that affects investors, causing irrational beh aviour is that of the feeling of regret. Authors argue that past bad decisions cause investors to feel regret and this alters their behaviour in such a way as to become irrational. Another factor that causes irrational behaviour is that of when the investor uses mental shortcuts in investment decisions. These shortcuts usually make investors choose the right decision but occasionally cause the investor to make the wrong decision. Optical illusions are a good example of how shortcuts can cause mistakes. A paper on www.undicoveredmanagers.com is one such paper that covers this point. The literature I have outlined in this section can lead me to say that the assumption of rationality or lack of rationality does occur. This leads to the theories on behavioural finance having a good solid basis. I can say this because there have been many authors who have observed that certain psychological factors do influence the investment decision. These factors include over confidence and the fear of regret. These arguments seem to empirically explain the anomalies that seem to occur in the investment world. In this section I will be looking at the anomaly of dot.com bubble in 2000. I will attempt to see if behavioural finance can explain the fall and rise of this bubble. First I will briefly explain what the dot.com bubble was. The dot.com industry was comprised of companies that have started up to sell goods and services over the Internet. They were given the name dot.com due to the fact that many website addresses ended with a à ¢Ã¢â€š ¬Ã‹Å"dotà ¢Ã¢â€š ¬Ã¢â€ž ¢ and the word com. At first, these companies were very successful and when floated on the stock market did very well financially. However, in 2000 this industry suffered a massive collapse. Many of these companies subsequently did not survive. I will now attempt to see if behavioural finance can explain this bubble. Many authors have argued that the new communication technology of the 1990à ¢Ã¢â€š ¬Ã¢â€ ž ¢s was exaggerated. By this I mean that the new innovation is by some corners, i.e. the media and governments, over triumphed. This can lead to irrational behaviour of investors. This can lead to investors becoming over confident in the technology or industry. Another factor of this over enthusiasm is that it could attract herding behaviour. The irrational investor will be more likely to invest in something that is being hyped up as they feel that others are doing the same thing. They will feel that if others are doing it then it must be a good idea for them to do it as well. A factor that will have led to the dot.com bubble is that of speculation. One such author that observed the speculation effect on the dot.com boom was Giombetti (2000). Many informed investors will have probably over invested in the technology industry going against market theory. They will have done this on the hope that their investment will pay off. Even if their investment was initially at a loss th ey would have stayed with it. Authors of behavioural finance outline this behaviour. This behaviour of these investors would have distorted the market conditions for other investors. Also, the herding effect would have been greater due to this. These factors would have led to the stock prices of the dot.coms being vastly over priced. This meant that when the bubble burst stock prices would have fell rapidly, causing investors to lose vast sums of money. This would cause them to pull out of the industry, which, in turn, cause the companies themselves to collapse. If it were not for irrational investment then investors might have pulled out earlier, before the collapse. This might have even meant that the collapse would not have happened. In conclusion, behavioural finance attempts to prove the assumption that investors do not always act rationally. It combines elements of psychology and financial to attempt to understand investment decisions. This helps explain why not all inve stors would choose the less risky option A with a guaranteed return. Factors that precipitate the irrational behaviour are over confidence, fear of regret and loss aversion. These factors cause investors not to take the correct investment decisions. This can go some way to explaining the dot.com bubble and its eventual collapse. www.UndiscoveredManagers.com (1999) Introduction to Behavioral Finance https://www.absoluteastronomy.com/encyclopedia/d/do/dot-com.htm Giombetti R. (2000) The Dot.com Bubble. www.EatTheState.org Vol 4, Issue 23 Harrington C. (2003) Head games: Helping quell investors irrational antics. Accounting Today, v17 i11 p5(2) Johnsson M., Lindblom H. Platan P. (2002) Behavioral Finance And the Change of Investor Behavior during and After the Speculative Bubble At the End of the 1990s Malkiel B. G. (1989) Is the stock market efficient? Science, v243 n4896 p1313(6) Shefrin H. Beyond Greed and Fear. (1999) Understanding Behavioral Finance and the Psychology of Investing. Harvard Business School Press Shleifer A. (2000) Inefficient Markets. An introduction to behavioural finance. Oxford university Press The Banker (2004) Cover feature: how much risk can you manage? Banks have a huge range of resources available to aid risk managers, but human nature can still result in a bad decision. Behavioural finance and prospect theory lifts the veil on poor investment judgement Don’t waste time! Our writers will create an original "Finance In Investment Example For Free" essay for you Create order

Wednesday, May 6, 2020

Characters With Psychological Disorders Adrian Monk and...

It seems recently that the entertainment industry has provided America with authentic portrayals of characters that are suffering with psychological disorders. At first glance these characters seem to depict the disorders they are given in a somewhat realistic light. At closer examination though, the truth of the seriousness of these disorders seems minimalized and at times even glorified. Two characters that come to mind are Adrian Monk, of the USA network show Monk, and Dr. Gregory House of the Fox TV show House. Adrian Monk was brought to life by actor Tony Shaloub, and was a funny and enjoyable detective show, which has now ended after eight successful seasons. Adrian Monk is a very likeable â€Å"Colomboesque† detective who was†¦show more content†¦Frequently episodes would focus on Monk being obsessed with a singular thought for example remembering a schoolmate bullying him and on a different episode wondering if a friend was going to â€Å"steal† hi s therapist. Monk repeatedly stated that he wished he could be more like â€Å"normal people† which did bring to light the obviously unwanted nature of his disorder (Feldman, 2008). Often though, the show depicted his disorder as funny and sometimes cute and endearing to those around him. Since I have a cousin who has been struggling with this disorder her entire life, I know that this is not realistic. My cousin has not been able to keep many jobs, and has lost most of the relationships with friends and even family. Idiosyncrasies that may be funny at first glance become annoying and difficult for those around the person to understand and put up with, especially on a long term basis. I do feel this show made an admirable attempt at depicting this disorder in a realistic manner and also keeping the entertainment level needed to keep people watching. Furthermore, it seems the show grew more realistic in depicting Monk’s disorder as it progressed. (Monk, 2002) . Another character that displays a psychological disorder is Dr. Gregory House, the title character of â€Å"House† which is portrayed by HughShow MoreRelatedOne Significant Change That Has Occurred in the World Between 1900 and 2005. Explain the Impact This Change Has Made on Our Lives and Why It Is an Important Change.163893 Words   |  656 Pagesrelevance of white ethnicity in the United States, not only regarding public activities like voting but also in terms of intimate behavior such as mores and manners, childrearing practices, adolescent styles, and attitudes toward illness, psychiatric disorders, and authority, even in cases where the individuals examined were not particularly aware of their ethnicity.70 The recent waves of migration are still too new to say anything definite based on the situations of existing migrant communities. The

Tuesday, May 5, 2020

Cross-cultural Interactions free essay sample

Communication differs in various cultures. A multinational or a global company employs a great number of people with different cultural traits. Some may possess traits that are good for business when sent to countries away from home and some may not take up this responsibility well. People with different values respond in various ways to leadership especially from leaders from a different background or culture. Cultural diversity is very wide and this would cause to some extent difficulties for a foreigner in a strange land. This is mainly because the foreigner has ittle or no knowledge of the lands culture. For instance being a German and working in a subsidiary of the German mother company in China, I have come to realize the big difference that there is in various cultures. The team that I work with is a cross- cultural team. National culture does not fit with the organizational culture from my experience in this cross-cultural team. We will write a custom essay sample on Cross-cultural Interactions or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page National culture is the values that an individual learns early in life and continues to grow or change slowly with generations. It is highly held in individuals hence difficult to influence . Organizational culture on the other hand means the wide guidelines that are created by an organization and is rooted on the Job tasks and practices.. It is a programmed way of thinking and reacting. It is used to differentiate a certain category of people from the other. Due to the deeply held national culture by people, it is difficult to change the organizational culture especially in a cross-cultural team. This is because for some, the organizational culture goes against the national culture therefore the practices of the organization will be taken for granted and undermined e. . a eadership trait which falls under an organizational culture can be easily shunned by a particular employee from a different culture if the trait is against his/her national trait. I encounter various tensions at my workplace. A group of a certain culture will follow or conform to a certain set of values and beliefs, and the other would differ from them. A large group with a set of similar values would f all in the same culture. The minority and the majority therefore have conflict when it comes to certain situations within the team. For instance, Germans are always on schedule and very unctual. This is their national culture. In the cross-cultural team there are people who have different perception when it comes to keeping time. When it comes to attending meetings for instance, there will be a set of people who will be punctual and those who will be late. This is a cause for tension within the cross-cultural team. Tension is a known cause for a decrease in a companys productivity. Action should therefore be taken to resolve tension or conflict in these teams. Conflict is a challenge that is always faced by a team that is cross-cultural because it arises from time to time. The success and failure of a team depends on its response in time of conflict. To initiate organizational changes, I have done research and have come up with a plan of giving lessons to my team members. These lessons dont give a direct solution to the conflicts but guidance on how to prevent, respond to and manage tension. The tips in my lesson plan include: Knowledge ot one selt and culture- when one becomes aware ot his culture, i. e. here he/she comes from and who he/she really is, it becomes easier to understand other peoples background hence become open to different ideas. This can be chieved by establishing friendship within the team Being inquisitive- ask other members with a different background from yours about your new environment and how best things are run and more importantly know how to deal with situations to avoid conflict Listen to people from a differen t culture effectively to have a better understanding of one anothers ways. This should only be done in situations where it doesnt cause discomfort. Learn the expectations of others by having conversations about conflicts and the way forward when it arises. Management culture that suits every single person from a different culture should be ut in place. Management culture is one of the most critical leadership tools. In my opinion, a type of management that respects the differences and similarities of all employees should be adopted. Excellent organizational culture is the main goal of a company or an organization in regards toa cross-cultural team. To achieve this goal, management culture must be put in place . First of all, understanding the uniqueness and the differences of each individual is very important. This is largely referred to as work place diversity. Diversity entails religious beliefs, gender, race, age, political beliefs, sexual orientation and ethnicity. To deal effectively with this, the HR should check on issues such as communication, coping with differences and change. Management culture is important because it creates a comfortable and positive working environment hence higher productivity from the employees. The following management strategies should be adopted: Acquiring knowledge about different cultures and their ways of conducting business The leaders should nurture the communication, creative and cultural skills of various employees and utilize these skills to improve the policies, customer service and their products Being open minded. This involves leaders and their employees coming out of their comfort zone and accepting ways that they are not familiar with in terms of management. People from different backgrounds can factor in better and fresh ideas which could result in better services and performance Formulation of programs that will recognize the diversity of each individual. This will result in more interest in their roles Posting employees to areas where they can advance culturally Language training Taking care of employees complaints and issues Testing the organizations practices to make sure that no discrimination against any ulture is practiced. At times, conflict becomes inevitable between members in the subsidiary. It always happens when there are people with a variety of different expectations. In a situation like this, I would resolve to a different way of handling conflict. The first step would be to make the employees aware of the difference in culture among them. Apart from making them aware, I would formulate a program where all employees will be taught about the existence ot diversity and to learn ways ot respecting these different values and practices. Encouraging the team to take up tasks overseas henever an opportunity arises is another positive way to handle inevitable conflicts. This will improve the interaction of employees with different backgrounds and cultures. The more knowledgeable they get about a variety of cultures, the more understanding of each other they also get. To avoid recurring tensions, another important strategy to follow through is to offer counselling to employees and their families that are moving to a new country. This can be done before and after the international assignment . When positive relationships are built between diverse individuals, a deeper understanding of each other is formed.