Behavioural Finance Essay Example for Free

Behavioural Finance Essay Hypothesis and the extent to which they can be explained by behavioural finance theories Finance that is based on rational and logical theories, such as the  capital asset pricing model  (CAPM) and the efficient market hypothesis (EMH). These theories assume that people, for the most part, behave rationally and predictably. The Efficient market hypothesis assumes that financial markets incorporate all public information and assets that share prices reflect all relevant to the firm information (Fama, 1970). Relevant information includes past information, publicly available information and private information. Efficient market is divided into three categories. Weak form efficiency is when stock prices reflect only the past information, semi-strong form is when past information and all publicly available information is reflected and strong form is when all the past, publicly available and information only available to company insiders is reflected on the stock prices. However, there are some anomalies and behaviors that couldnt be explained by EMH. Market participants often behaved very unpredictably. However there is a new study called behavioral finance that is trying to explain all these anomalies. Behavioral finance studies the irrational behavior of the investors. Weber (1999) makes the following observation: ‘Behavioral Finance closely combines individual behavior and market phenomena and uses the knowledge taken from both the psychological field and financial theory’. Behavioral finance attempts to identify the behavioral biases commonly exhibited by investors and also provides strategies to overcome them. Some of the main problems with EMH may be cause by heuristic responses to new information, psychological anchors, overconfidence, social fads, framing and regret avoidance and herd behavior. Overconfidence: According to Nevins (2004), overconfidence suggests that investors overestimate their ability to predict market events, and because of their overconfidence they often take risks without receiving commensurate returns. Odean (1998) finds that investors tend to overestimate their ability, unrealistically optimistic about future events, too positive on self-evaluations, over-weight attention getting information that is consistent with their existing beliefs, and over-estimate the precision of their own private information. Overconfidence about private signals causes overreaction and hence phenomena like the book/market effect and long-run reversals whereas self-attribution maintains overconfidence and allows prices to continue to overreact, creating momentum. In the longer-run there is reversal as prices revert to fundamentals. Psychological Anchors, Overreaction: Good news should raise a business share price accordingly, and that gain in share price should not decline if no new information has been released since. Reality, however, tends to contradict this theory. Oftentimes, participants in the stock market predictably overreact to new information, creating a larger-than-appropriate effect on a securitys price. Furthermore, it also appears that this price surge is not a permanent trend although the price change is usually sudden and sizable, the surge erodes over time. Heuristic responses to new information: Availability heuristic is used to evaluate the frequency or likelihood of an event on the basis of how quickly instances or associations come to mind. When examples or associations are easily brought to mind, this fact leads to an overestimation of the frequency or likelihood of this event. Example: People are overestimating the divorce rate if they can quickly find examples of divorced friends. People tend to be biased by information that is easier to recall. They are swayed by information that is vivid, well-publicized, or recent. People also tend to be biased by examples that they can easily retrieve. ( Tversky and Kahneman, 1974) Confirmation bias  is a cognitive bias whereby one tends to notice and look for information that confirms ones existing beliefs, whilst ignoring anything that contradicts those beliefs. It is a type of selective thinking. The reason for overconfidence may also have to do with hindsight bias, a tendency to think that one would have known actual events were coming before they happened, had one been present then or had reason to pay attention. Hindsight bias encourages a view of the world as more predictable than it really is (Shiller, 2000). This is the characteristic of investors, when looking back, seeing events that took place in the past as having been more predictable than they seemed before they happened. Likewise, things that didn’t happen seem, with hindsight, much less likely to have happened than they did beforehand. Self-attribution bias occurs when people attribute successful outcomes to their own skill but blame unsuccessful outcomes on bad luck (Shefrin, 1999). Availability bias is the availability deviation is a general rule or a mental shortcut which lets people guess the probability of a result and to what percent it may appear in their daily life. Those who commit such a deviation consider the easily recalled events more probable than those they can hardly imagine or perceive. Availability bias declares the persons tendency toward deciding and judging based on available and easily accessible data (Tversky and Kahneman, 1982). Herd behavior which is the tendency for individuals to mimic the actions (rational or irrational) of a larger group. Blackmore (1991) states ‘Within an hour of birth , humans engage in imitation’. There are a couple of reasons why herd behavior happens. Its unlikely that a large group could be wrong. After all, even if you are convinced that a particular idea or course or action is irrational or incorrect, you might still follow the herd, believing they know something that you dont. Recency bias is the tendency for people to place greater importance on more recent data or experience. This is the problem of putting too much weight on current events or data and not enough weight on past, historic trends. Many investors expect the market to continue rising in a current bull market; likewise, these same investors often expect a current bear market to get worse. Recency is shown in momentum investing when investors buy â€Å"hot† stocks simply on the basis of their recent strong performance. Kahneman and Tversky (1973) find that people usually forecast future uncertain events by focusing on recent history and pay less attention to the possibility that such short history could be generated by chance. It is believed the net effect of the gains and losses involved with each choice are combined to present an overall evaluation of whether a choice is desirable. However, research has found that we dont actually process information in such a rational way. In 1979, Kahneman and Tversky presented an idea called  prospect theory, which contends that people value gains and losses differently, and, as such, will base decisions on perceived gains rather than perceived losses. Thus, if a person were given two equal choices, one expressed in terms of possible gains and the other in possible losses, people would choose the former even when they achieve the same economic end result. Regret avoidance is the tendency to avoid actions that could create discomfort over prior decisions, even though those actions may be in the individual’s best interest. Researchers have argued that one of the reasons that investors are reluctant to sell losing positions is because to do so is to admit a bad decision. This reluctance can be linked to both regret avoidance and belief perseverance. To avoid the stress associated with admitting a mistake, the investor holds onto the losing position and hopes for a recovery. According to prospect theory, losses have more emotional impact than an equivalent amount of gains. Prospect theory also explains the occurrence of the disposition effect, which is the tendency for investors to hold on to losing stocks for too long and sell winning stocks too soon. The most logical course of action would be to hold on to winning stocks in order to further gains and to sell losing stocks in order to prevent escalating losses. The flip side of the coin is investors that hold on to losing stocks for too long. Investors are willing to assume a higher level of risk in order to avoid the negative utility of a prospective loss. Unfortunately, many of the losing stocks never recover, and the losses incurred continued to mount, with often disastrous results. The January-Effect is where the average monthly return for small firms is consistently higher in January than any other month of the year; in the UK this is observed in April. This contradicts with EMH, as EMH predicts that stocks should move at a random walk. January returns are greatest due to yearend tax loss selling of shares disproportionally (Branch 1977). Another anomaly of this type is the Weekend-Effect, where Fama (1980) found that returns on Mondays tend to be negative if compared to any other week day, but this has disappeared in the UK by the 1990s. Some theories that explain the effect attribute the tendency for companies to release bad news on Friday after the markets close to depressed stock prices on Monday. Others state that the  weekend effect might be linked to short selling, which would affect stocks with high short interest positions. Alternatively, the effect could simply be a result of traders fading optimism between Friday and Monday. Index effect is a phenomenon where the addition to, or deletion from, a stock index causes a change in the price, trading volume, volatility or operating performance of the stock concerned. A stock entering an index will automatically receive increased demand from institutional investors principally index tracker funds and exchange trade funds (ETFs) while a deleted stock will experience reduced demand. The fact that a stock jumps in value upon inclusion is once again clear evidence of mispricing: the price of the share changes even though its fundamental value does not. Another anomaly is P/E effect from CAPM model; portfolios with low P/E ratios outperform those with high. The low price-earnings ratio effect occurs because stocks with low price-earnings ratios are often  undervalued and their prices eventually rise because investors become pessimistic about their returns after a bad series of earning or bad news. A company with high price to earning tends to overvalued (De Bondt and Thaler, 1985). Winner-Loser anomaly De Bondt and Thaler (1985) found that shares which initially earn extreme positive return (winners) or extreme negative returns (losers) experience extended reversals in their performance over long horizons. De Bondt and Thaler (1985) suggested the overreaction hypothesis as an explanation of their result. This hypothesis claims that the market overreacts to information. That is, the market overweights the most recent information and underweights earlier information. However, this phenomenon is reversed when it is recognized that the market’s expectations were indeed an overreaction to the information released. This hypothesis also offers an explanation of the P/E effect. Fama and French (1992) showed that a powerful predictor of returns across securities is the ratio of the book value of the firm’s equity to the market value of equity. After controlling for the size and book-to-market effects, beta seemed to have no power to explain average security returns. One explanation is that investors overreact to growth aspects for growth stocks, and value stocks are therefore undervalued. According to some academics, the ratio of market value to book value itself is a risk measure, and therefore the larger returns generated by low MV/BV stocks are simply a compensation for risk. Low MV/BV stocks are often those in some financial distress. All of these anomalies may be explained by behavioral finance. Behavioural finance is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets. Behavioural finance is of interest because it helps explain why and how markets might be inefficient. There are series of  behavioural biases  Ã¢â‚¬â€œ strange twists in human nature that cause us to act irrationally and against our own interests. On the other hand all of these anomalies may instead be an artifact of data mining. After all, if one reruns the computer database of past returns over and over and examines stock returns along enough dimensions, simple chance will cause some criteria to appear to predict returns. May be this is why some anomalies appear to be lost at some point of time e. g. the weekend effect during the 90s.

Civil War :: American America History

Civil War Writing about recorded history should be a relatively easy task to accomplish. Recorded history is based on facts. Regardless of what time period one may write about, one will find enough information about that time of period. The key is to put everything in a logical and understandable manner. This paper will be about the Civil War. I will try, to the best of my knowledge, to discuss the North's and South's positions and Arguments for going to war, their initial military strategies and their strength and weaknesses. The paper will actually be a summary from chapter 10 of the book Battle Cry of Freedom: The Civil War Era By: James McPherson, "Amateurs Go To War". Before discussing the war itself, one must understand the Union's and the Confederate's arguments and reasons for going to war. Let's start at the beginning, when the South was first showing animosity for the North, which eventually led to sessionist ideas by the South. The Compromise of 1850 was drafted in response to the threat of a Southern Convention, because of Zachary Taylors decision to carve out two huge territories in the Far West and to admit them in the union as free states. Henry Clay drafted the compromise, which includes eight parts. "The first pair would admit California as a State and organize the remainder of the Mexican cession without "any restriction or condition on the subject of slavery". The second pair of resolutions settled the boundary dispute between Texas and New Mexico in favor of the latter and compensated Texas by federal assumption of debts contracted during its existence as an Independent Republic. Clay's third pair of resolutions called for abolition of the slave trade in the District of Columbia but a guarantee of slavery itself in the District. As if these six proposals yielded more to the North then to the South, Clay's final pair of resolutions tipped the balance Southward by denying congressional power over the interstate slave trade and calling for a stronger law to enable slave holders to recover their property when they fled to free states" Battle Cry of freedom: The Civil War Era, McPherson James, (p.70-71). The Northerners hated the fugitive slave law, because in the past it was never enforced and it never gave a trial by jury to any runaway slaves. The only testimony heard was that of the slaveholder and he usually recovered his slave. Civil War :: American America History Civil War Writing about recorded history should be a relatively easy task to accomplish. Recorded history is based on facts. Regardless of what time period one may write about, one will find enough information about that time of period. The key is to put everything in a logical and understandable manner. This paper will be about the Civil War. I will try, to the best of my knowledge, to discuss the North's and South's positions and Arguments for going to war, their initial military strategies and their strength and weaknesses. The paper will actually be a summary from chapter 10 of the book Battle Cry of Freedom: The Civil War Era By: James McPherson, "Amateurs Go To War". Before discussing the war itself, one must understand the Union's and the Confederate's arguments and reasons for going to war. Let's start at the beginning, when the South was first showing animosity for the North, which eventually led to sessionist ideas by the South. The Compromise of 1850 was drafted in response to the threat of a Southern Convention, because of Zachary Taylors decision to carve out two huge territories in the Far West and to admit them in the union as free states. Henry Clay drafted the compromise, which includes eight parts. "The first pair would admit California as a State and organize the remainder of the Mexican cession without "any restriction or condition on the subject of slavery". The second pair of resolutions settled the boundary dispute between Texas and New Mexico in favor of the latter and compensated Texas by federal assumption of debts contracted during its existence as an Independent Republic. Clay's third pair of resolutions called for abolition of the slave trade in the District of Columbia but a guarantee of slavery itself in the District. As if these six proposals yielded more to the North then to the South, Clay's final pair of resolutions tipped the balance Southward by denying congressional power over the interstate slave trade and calling for a stronger law to enable slave holders to recover their property when they fled to free states" Battle Cry of freedom: The Civil War Era, McPherson James, (p.70-71). The Northerners hated the fugitive slave law, because in the past it was never enforced and it never gave a trial by jury to any runaway slaves. The only testimony heard was that of the slaveholder and he usually recovered his slave.

How to improve students’ Performance Essay

The success of any educational system is crowned by the success of the students in their academic performance. Every classroom layout and school structure should therefore be created to provide the most intrinsic way with which the learners can be motivated toward the learning process which consequently implies their good performance. Many schools and learning institutions have captured the interest of the student success as the central point which therefore provides a future benchmark for a continued strong portfolio in the academic context in the community. An important process which can provide a stepping stone towards students’ success is that of classroom organization which implies that the learning needs of every student are catered for within the dimensions of their placement within the classroom setup. Majority of the learning and classroom organization involves various assessment methods with which students can be evaluated of the learning and academic achievement levels. Tutors are required that they collect various information that can be extracted from the assessment methods and consequently analyze it which they can therefore use to create the most lucrative methods of advice and strategies that align with the demands and needs of their academic achievement (http://www. rmcdenver. com/useguide/assessme/reflect. htm). The foremost precept which can be employed in evaluating the level of success by a student is a cordial evaluation and interpretation between whatever content that a student could have mastered and that which has not in order to intuitively evaluate the area of concern which needs improvement. The choice of re-teaching a certain area of concern that has already been taught to students requires an evaluation on the number of students that have mastered the section or those that have not mastered the same. In the event of a large number having successively mastered such an area of concern, the remaining small group can be grouped in some group works and consequently accessed in terms of re-teaching or offering them with assignments. The general theory of learning provides that success or failure of a student in the learning process depends on the statutory context of the materials and resources that are offered to him/her as learning aids and the effort that the teacher applies in instilling educational competence and learning to the students. From this description, we can internalize two important aspects that underlie the primary basics towards the academic success of the student. First, is the level and content of the educational resources that are provided for the student in the learning process. Secondly, is the degree and scope of efforts and teacher commitment towards the teaching process in the classroom. From these two premises, we can delineate that students should be offered with the most adequate and promissory facilities and resources that provide them with a hub of fountain learning environment. Either, the efforts and the level of teacher commitment is of necessity important in leveraging a promising success in the student achievement in the learning process (http://www. rmcdenver. com/useguide/assessme/reflect. htm). As an important component, it goes without saying that the role of each participant in the learning context of the student is one such an important aspect that provides a likelihood of parametric concern in the students’ success. In this context, various key role players including the teachers, parents, the student themselves and the school boards are all fundamental in laying foundations and framework with which the student success can be supported. Therefore, each should play their respective roles in the most resilient manner which consequently provides an ideal environment for the student’s success.

The Fall Of The Roman Empire - 1495 Words

The mighty Roman Empire thought by many to be the ultimate stronghold had its days numbered. Many factors led to the fall of the Roman Empire, from inflation to its poor leaders and generals, but it wasn’t just one thing that caused the entire empire to fall it was a series of events that caused this juggernaut of an empire to meet its sad demise. The fall all began in 235 when the Roman throne was able to be taken by any general who had the military power to seize it. This caused many military generals to create an army that was loyal to them instead of the Empire so they could have power for themselves instead of trying to improve the Roman Empire. The result from this was that Rome didn’t have one ruler who took control over the entire Empire it was many. From 235 to 284 in the course of 49 years there had been 22 emperors, each emperor making and changing laws at their will but making it confusing to the residents of Rome since the Laws had been changed so many time s by different people. This caused much confusion over Rome and it didn’t help that at the same time the empire was in the middle of being attacked by a series of different empires. Invasions, leadership problems and a plague that broke out nearly caused an economic collapse in the third century. Labor affected by the plague caused problems with military recruiting and economy since most people were dying and nothing could be done. This made it difficult for the Roman armies to defend Rome so they recruitedShow MoreRelatedFall of the Roman Empire1288 Words   |  6 PagesThe Pax Romana was a two hundred year time period where the Romans had peace and prosperity under Augustus. The Roman empire started to decline at the end of the prevail of the last five emperors, Marcus Aurelius in 161-180 A.D. The rulers in the next century had no idea how to deal with the problems the empire was having. There was many reasons to the fall of the Roman Empire but three stood out the most. T he preliminary reason was the economy begins to decline. The alternative reasoning was RomeRead MoreThe Fall Of The Roman Empire1537 Words   |  7 PagesAncient Rome was an empire so dominant, wealthy and economically- stable which came to a dramatic fall in the period of 250AD- 500AD. Ancient Rome faced unexplained unfortunate events which crumbled the Great Empire from the affluent empire to a impoverished society. For centuries historians have timelessly theorised and analysed many debates and research in relation to the Fall of the Roman Empire. What really caused the predominate Roman Empire to fall? Did Rome fall naturally? Was disease, suchRead MoreFall of the Roman Empire758 Words   |  4 PagesTaylor Davino Professor Horsley HIS 126 3 March 2010 The fall of the Roman Empire Political, economic and social aspects were all involved in the fall of the Roman Empire. In 395 A.D., Rome was divided into two empires, with one capital in Rome and the other in Constantinople. During that time, the western Roman Empire was being invaded by barbarian tribes from the North. In 410, the Visigoth tribe succeeded in conquering the western capital in Rome. In 476, the western EmperorRead MoreThe Fall Of The Roman Empire1419 Words   |  6 PagesThe Roman Empire was a powerful governing body of extensive political and social structures throughout western civilization. How did this empire fall and were internal factories responsible? Slow occurrences in succession to one another led to the fall of the empire rather than one single event. The fall of the Roman Empire was a combination of both internal and external pressures, not just one, leading up to the complete decay of the cities—Rome and Constantinople. However, one could argue how oneRead MoreThe Fall Of Ro man Empire1185 Words   |  5 PagesThe Fall of Roman Empire Roman Empire was considered as one of the most influential and dominant Empire in the history that has ever existed. â€Å"The Roman Empire at its zenith in the period of the Principate (roughly, 27 BC to AD 235) covered vast tracts of three continents, Europe, Africa, and Asia† (Garnsey). It was an ancient, modern Empire, and it supported anyone who made discoveries and technological improvements. The Empire was the strongest governing body in the Mediterranean. If the RomanRead MoreThe Fall Of The Roman Empire1440 Words   |  6 PagesSophie Loren Plays a Leading Role in the Fall of the Roman Empire? The reason for the fall of the Roman Empire is a controversial topic under much historical debate. How did such a great empire, known for being one of the largest that lasted over a millennium, fall? The Roman Empire transitioned from a republic to an empire in 31 BCE. Augustus Caesar was the first emperor. He created harmony in Rome, but not in calendars as he added August as the eighth month to follow July, which was named afterRead MoreFall of Roman Empire1175 Words   |  5 PagesThe Fall of the Roman Empire The Ancient Roman empire was one of the most prominent and successful societies of its time period. By the end of their reign, the Romans had conquered almost all of the Mediterranean including parts of present day Europe, Asia, and Africa. Rome was at its strongest during the rule of Augustus Caesar, this time was known as the â€Å"Pax Romana† or Roman peace. It wasn’t until later, when Emperor Trajan took over in about 98 C.E. that the Empire reached its peak. AfterRead MoreThe Fall of the Roman Empire609 Words   |  3 PagesThe Fall of the Roman Empire There are adherents to single factors, but more people think Rome fell because of a combination of such factors as Christianity, and economy, and military problems. Even the rise of Islam is proposed as the reason for Romes fall, by some who think the Fall of Rome happened at Constantinople in the 15th Century. Most people think it occurred during the fifth century, after the western division of the empire. There were several reasons for the fall of the Roman EmpireRead MoreThe Fall Of The Roman Empire1438 Words   |  6 PagesThe Roman Empire was one of the most powerful empires in the history of mankind. In 476 CE Odoacer defeated Romulus Augustus to capture Rome; most historians agree that this was the official end of the Western Roman Empire. There is much debate on how exactly Rome declined and eventually fell. The fall of Rome was a long process that took place over many centuries. There are five main schools of thought on why Rome fell. First, Christianity, offered by Edward Gibbons; He suggests that ChristianityRead MoreThe Fall Of The Roman Empire1495 Words   |  6 PagesFor a long period of time, the debate about the cause of the fall of the Roman Empire has been a popular topic amongst historians. Most of these historians look at the issue from a standpoint that accepts that there were most likely several causes. The main root of the issue is whether or not these causes were internal or external. Some historians even go more in depth and try to hypothesize what the internal or external causes were. In fact, Adrian Goldsworthy and Peter Heather do just this when