Question

Explain how behavioral finance can provide insights to corporate financial managers.

Answer 1

Corporate financial managers are the financial experts of the company who takes care of day to day financial transactions of company and make strategies, give advice on various finance related issues of the company’s top management. The major task of corporate financial manager is taking care of financial health of the company in short term as well as in long term. Behavioral finance is based on psychology or emotions of investors. The behavior of investors is different in different market conditions and sometime they overestimate their abilities to predict or time the market. Basically there are three types of biases which are self-attribution bias, overconfidence and hindsight bias.

• Self-attribution bias is related to individual’s tendency to overestimate their talent at the time of success and at the time of failure they blame it to other factors.
• Overconfidence is related to overestimation of their abilities to predict or time the market
• Hindsight bias is the tendency of individuals where they think that they have performed better than actually they do or they have predicted it before it actually happened. This process hinders their abilities of future learning.

Behavioral finance can provide insights to corporate financial managers while accessing and making different financial strategies, incorporate the understanding of sentiments of investors.