what are the implications of behavioural Finance for Portfolio mangers, Markets and Investors?

Expert Solution

Implications of Behavioural Finance for Portfolio managers, Markets and Investors:

Behavioural Finance focusses on psychological influences and biases that affect financial decisons of investors, financial managers etc. The implications for market participants like portfolio managers, markets and investors include:

1. Stock market returns are one of the most significant areas where this type of finance plays its charm via speculations, hedging etc.

2. Efficient Market hypothesis says that the stock prices at any given point of time, reflects all market information accurately and hence there are no opportunities to make profits from mispricing of stocks. However, behavioural finance takes an opposite view and says that markets are never fully efficient. Thus, psychological factors of investors do play a major role in influencing the trading of stocks.

3. The understanding of behavioral finance biases is applied to stock and other trading market movements on a daily basis. Broadly, behavioral finance theories have also been used to provide clearer explanations of substantial market anomalies like bubbles and deep recessions.

4. Investors and portfolio managers also focus on understanding the behavioural finance trends so as to analyze the market fluctuations for speculation as well as making investment decisions.

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