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Essay / Research Paper Abstract
This 12 page paper answers three questions concerning behavioural finance. The first question looks at how and why a choice might be made when there is a certain amount of money and then a risk with a 50% chance of doubling the money and a 50% chance of loosing it all. The second question considers the rational model of efficient market hypothesis and considers whether this or behavioural finance is most accurate. The last question uses behavioural finance to explain the boom and bust cycle seen in stock market, such as with the dot com fall. The bibliography cites 16 sources.
Page Count:
12 pages (~225 words per page)
File: TS14_TEbehfina.rtf
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Unformatted sample text from the term paper:
the situation where there is $100,000 available, but if an investor wants to take a risk there is a 50% chance they will be able to double it, but there
is also a 50% chance that the investor will end up with nothing. If we look at behavioural finance we ca consider which option is likely to be the most
popular and why. In the ideal scenario an investor would weight up the risk and the reward and consider the logic of their own position to make a judgment,
however many studies in behavioural finance all tell us that there is a strong link between emotion and the way in which rationality will, or will not, be present in
decision making. Studies by Grossberg and Gutowski (1987) and Loewenstein (2000) both illustrate this well with the way that errors of judgment may occur as a result of the impact
of emotion (Lo and Repin, 2001). If we look at the decision regarding their $100,000 the decision of the majority of investors are likely to choose to take the
money and not face the risk. Mayes (2002) identifies a number of perception influences that will manifest in the way the decision is made. Mayes cites 6 reasons that may
impact on a rational judgment, these are overconfidence, fear of regret, cognitive dissonance, anchoring, representativeness and myopic risk aversion. Research also indicates that where judgment is impacted by intuition this
can also be very wrong, as research indicates this not usually based on subconscious logic, as was once believed to be the case (Cosmides and Tooby, 1996). If there
is not the support of intuition then we need to look at these impacts, many of which may be seen as supporting the less risky choice. The fear of regret
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