Question

6. What are the 4 basic premises for Behavioral Finance? Name the 4 and explain each.

Answer 1

Answer:

Behavioral Finance- It is the theory of finance that says that people make certain financial choices on the basis of their investment decisions that are influenced by the market events. This includes the investors' sentiments about the market. This theory says that investors are not rational rather they are normal in general, they may take wrong decisions if they do not have proper knowledge of market. Efficient market hypothesis says that stock prices reflect all available information.

4 basic premises for Behavioral Finance- Are as following:

Mental accounting- The propensity to allocate money for specific purpose.

Herd behavior- This is the habit of people to imitate the financial behavior of a majority.

Anchoring- The attachment of a spending level to an easy reference such as spending more money on a specific brand.

High self rating-The tendency of individuals to rank themselves higher than an average individual.