Question

Short essay question, please explain in details

A) Explain Minsky’s financial instability hypothesis and discuss the proposition that Minsky can be regarded as a behavioural finance theorist.

B) Compare and contrast Expected Utility Theory and Portfolio Theory as descriptions of how decisions are made under conditions of risk. What are their main similarities and differences?

Answer 1

Answer)

1. Minsky 's financial instability states that financial crisis or crashes are results of debt and excessive borrowing from private players which create financial bubble in the market leading to crisis,borrowing by different type of bortoeers such as speculative borrowers lead to instability,one prime example is subprime mortgage crisis of 2008 where we witnessed this theory.Minsky can be regarded as a behavioural finance theorist as his work and theory looks at how speculative borrowing is influencial in popping up reckless behaviour and when everyone is over enthusiastic about economy,this leads to irrational behaviour and thus his work gives indication that it can be regarded as financial behaviour theorist.
2. Expected utility theory deals with situations where uncertainity is there ,portfolio theory deals with investment where portfolio can be maximized for a given risk,in terms of similarities both theories looks at maximizing the returns,both theories have certain drawdowns be it in terms of probabibility of loss or risk possible,however in terms of differences we see that expected utility theory deals with undefined risk but portfolio theory has defined risk,similarly reward is much more variable in expected utility theory than defined and rangebound reward of portfolio theory.

Answer is complete.Thank you!