Question

Critically evaluate a stock and analyze the impact of an event on the stock price within the context of traditional finance and behavioral finance theories.

Guidelines

(1) Give a background of the chosen company. Choose one company and explain the rationality of the stock price based on traditional finance theories.

(2) Please comment on the stock and discuss whether you would like to buy/sell under current situation based on factor analysis such as size, value, momentum.

(3) However, we all know investors are not rational. Choose a piece of news and analyze its impact on the stock price based on behavioral finance concepts. Please attach your news in the appendix.

Suggested content The analysis includes (but is not limited to) the followings:

1. Introduction

2. Background of the listed company based on traditional finance theories

3. Justification on your buy/sell decision based on factor analysis.

4. Discussion of how the event in the news will affect the price using behavioral finance concepts.

5. Conclusion.

Answer 1

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Impact of Behavioral Finance & Traditional Finance on Financial Decision Making Process

Article (PDF Available) · January 2014 with 3,766 Reads 

Cite this publication

• 

  Muhammad zulqarnain Asab

  • 1.71
  • The Islamia University of Bahawalpur

• 

  Sobia Manzoor

• 

  Hina Naz

Abstract

This paper examines the individual investment preferences and discusses the different factors of behavioral finance which are related to investment influence in developing countries like, Pakistan. Introduction simply discuss difference between traditional and behavioral finance literature consists on different factors of behavioral finance and traditional finance. Third portion consists on impact of both traditional and behavioral finance on investment the fourth sections discusses the comparison of different research results and at the last part contained the conclusion. Introduction: Decision making is very important activity for the process of choosing an alternative option from a situation that show good results to individual or investors. Investment purpose is to generate money for investors. Market individual and information structure influence the decision of investment. So that investment sometimes show negative results to investors for that purpose they invested or they not get satisfied results from their investment due behavior of investors about investment. Buchan, (2001) stated that "Money is desire Embodied". Kahneman and Tversky, (1979) and Statman, (1999) stated that people feelings of pain when they find out that the other choice have good results. So Behavioral finance is the study that gives description to investors who are interested about finding how individual emotions or behavior are related to drive share prices. Behavioral finance explains about how and why emotions and cognitive biases create anomalies about stock market for investors. But in modern finance we take the concept of rationality and logical theory based decision like Capital Asset Pricing Model, efficient market theory that considered people are rational and work for their wealth maximization but the fact is that people behave irrationally that are not predictable in real life that irrationality is linked from behavioral finance. Behavioral finance explains our action and behavior but modern finance is related to explanation of actions of an economic man. Traditional finance is related to decisions in which full information's are available for making investment decision. Becker (1962); Thaler (1990) stated in role of Behavioral Economics and Behavioral Decision making in Americans Retirement savings decisions that Individuals keep the full information according to the Traditional theory; they can also share the information and rational decision makers. Proprieties of these people remained constant overtime and well-defined. Phung, (2010) explained that Behavioral finance is comparatively a new field that develop the combination of psychological theory, cognitive and behavioral with finance and conventional economic that provide the conclusion about the irrational decision making of the people. Behavioral finance theory was firstly developed in 1980 among small group of academics of different fields. Shefrin (1999) stated the behavioral finance is a rich expansion in the field of finance that compare the influence of psychology on financial practitioner behavior. Statman (1999) stated that behavioral finance also explain that how emotions and cognitive errors show their impact on the decision making process of the investor about the investment. Behavioral finance consists of two reasons that people do not find about their financial attitudes that investigate feeling of investors that are deviated in attitude these deviations are consists of two sub categories that are. (i) Cognitive Deviations: These deviations are generated by time, memory, attentions and limitations of these deviations have priority for behavioral finance.