Behavioral Finance

Behavioral Finance

Financial decision making requires the implementation of effective regulations. Similarly, different disciplines like psychology and economics, influence the nature of the rules utilized in making rational judgments. The decisions made in life rely on the need to maintain happiness. Equally, the choices made regarding emotional and economic situations must result in the achievement of long term objectives. Similarly, the actions that result in personal satisfaction depend on external factors like government regulations and economic conditions. According to Daniel Kahnemann article on Behavioral Finance, the theory of behavioral finance is critical in the implementation of commercial plans. Kahnemann is a Professor in Psychology at the Princeton University (BCC Speaker, 2018). However, Kahnemann indicates that some of the choices made by financial managers rely on irrational thoughts. As such, the decisions focus on the short term rather than long term needs.

Similarly, the managers end up with the selection of inadequate measures. According to the psychologist, the majority of the decisions made by the investors result in irrational judgments. The model proposed by the speaker indicates that the cognitive ability of the individuals influences the choices made during the investment processes. As such, the decisions are the emotional nature of the investors. Kahnemann feels that psychology plays a significant role in the formulation of market choices. Since individuals involved in the process make several choices following emotional perceptions, the final decision significantly affects economic performance. As such, psychology plays a significant role in the enhancement of financial investments. Accordingly, the psychologist feels that humans are faced by a dilemma when making selections from a wide range of options.

Similarly, emotional reasoning results in the implementation of biased financial strategies. Accordingly, the speaker talks about the situation that arises when individuals have to make decisions that involve risk-taking. Similarly, the choices made by the investors are those that will result in high returns and minimize the risk value (Chater et al., 2018). Further, according to the psychologist’s prospect theory, investment decisions made by the financial players result in different reactions depending on the amount of risk or loss caused in the process. For instance, Kahnemann feels that the financial investors are concerned with the losses and gains made rather than the accumulated wealth. Such decisions result in the formulation of short term instead of future projections. As a result, in a scenario that involves the choices that must be made by individuals during the selection of investment opportunities, individual financial managers are likely to prefer prospects that are low risk and result in profits (Gill et al., 2018). Thus, the decisions made by personal reasoning have a significant effect on the investment capabilities of an organization.

The nature of argument consequently means that investment choices should rely on collaborative organizational effort. According to Kahnemann, the decision made should not rely on personal rationalism but rather the long term advantages. Ultimately, the professor has made a significant change in economics. The establishment explores the influence of psychology on the field.

The Paradox of Choice

The article, The Paradox of Choice, explores the nature of choices made by consumers. According to Barry Schwartz, the decision-making process is complicated in situations where there exist multiple options for individuals (TED, 2007). Equally, according to the author, the paradox in the case means the scenario where the availability of numerous options results in decreased market sales. The presence of several choices means that the consumer faces the dilemma of the selection of products to meet their needs. The confusion is as a result of psychological issues. For instance, the presence of different options means that while the client may make a particular choice, the final decision does not necessarily mean that the effect of the other selections is negligible. According to the video, the availability of numerous opportunities consequently results in a variety of adverse decisions. As a result, in illustrating the paradox the psychologist uses the case of clients, the professor indicates that consumers are likely to purchase a product from a smaller range of choice than a more extensive collection.

Further, the factor influences the formulation of marketing decisions. The innovation ideas executed by the top management thus should focus on the creation of a smaller product range that will enhance the consumer decision-making process (Spiegler, 2019). While the existence of product variety is crucial in modern marketing trends, the presence of different choices also results in organizational risks. During the presentation, Schwartz notes that more choice does not necessarily transform into profitability. The statement implies that the invention of product types in an already flooded market may result in poor performance due to choice constraints.

Additionally, the propositions by the psychologist also indicate that innovation projects should focus on profitability rather than the increment in product types. However, the paradox may also create a profitable scenario for organizations. For instance, by taking advantage of the product variety, the brand can focus on the manufacture of goods that match the client needs. Thus, the paradox of choice provides manufacturers with the option of utilizing innovation for the provision of customer-oriented products.

Behavioral Finance and the Role of Psychology

In the explanation of the relationship between behavioral finance and psychology, the speaker, Professor Shiller, provides criticism regarding the efficiency of marketing operations (YaleCourses, 2012). For instance, in the presentation, the professor argues that the performance concerning market prices do not necessarily transform into effective market performance. Further, the speaker provides illustrations to explain the notion of psychological influence on behavioral finance. For instance, the psychologist utilizes an experiment that involves the measurement of group impact on the choices made by individuals. Similarly, the respondents were moved in a dark room, and their opinions on the light speed recorded. The experimental expectations reveal that the distance covered by the waves is stationary. From the experiment, the results indicated a common opinion. The responses provided by the study group was as a result of influence among the participants. Similarly, the professor infers that mass psychology influences the decisions made regarding financial markets. Accordingly, perception means that masses and fashion trends significantly change modern market trends.

Additionally, the Shiller formulation also means that the economic decisions made largely depend on the sociological aspects of the consumers. Similarly, there is a need for thorough analysis of the impacts of psychological aspects of the clients on economic performance. The social and psychological variations influence the choices made concerning stock prices. Ultimately, according to the professor’s perceptions, social characteristics affect the organizational decision-making processes. The groups also create pressures that ultimately influence consumer perceptions. As such, the investments made are significantly affected by social features

References

BCC Speaker. (2018, January 11.). Daniel Kahneman- Behavioral Finance. [Video File]. Retrieved from https://www.youtube.com/watch?v=RwdNeMD_-0c&feature=youtu.be

Chater, N., Felin, T., Funder, D. C., Gigerenzer, G., Koenderink, J. J., Krueger, J. I., & Stanovich, K. E. (2018). Mind, rationality, and cognition: An interdisciplinary debate. Psychonomic bulletin & review, 25(2), 793-826.

Gill, R. K., Gill, R. B. R. K., & Bajwa, R. (2018). Study on Behavioral Finance, Behavioral Biases, and Investment Decisions. International Journal of Accounting and Financial Management Research, 1-14.

Spiegler, R. (2019). Behavioral economics and the atheoretical style. American Economic Journal: Microeconomics, 11(2), 173-94.

TED. (2007, January 16.). The Paradox of Choice | Barry Schwartz. [Video File]. Retrieved from https://www.youtube.com/watch?v=VO6XEQIsCoM&feature=youtu.be

YaleCourses. (2012, April 5.). Behavioral Finance and the Role of Psychology. [Video File]. Retrieved from https://www.youtube.com/watch?v=chSHqogx2CI&feature=youtu.be