Question

This course emphasized the use of a rational, objective risk management process that involves knowledge of the organization’s objectives, the identification of risks that could potentially hamper achieving those objectives, an assessment of the likelihood and impact of those risks on objectives, an analysis of alternative methods of managing the risks (retention, mitigation, insurance, hedging, etc.). Identify and briefly explain a common behavioral bias that can derail this rational, objective process.

Briefly describe some actions or processes that could be implemented to overcome this behavioral bias?  

Answer 1

Behavioural finance is a new area of study that uses psychological theory and economic theories. They predict the trading patterns and behaviours, and that can be used for better strategies for warning more gains. There are behavioural bias that affects the traders that hinder their objectivity that affects their investment decisions. The existence of behavioural bias affects the rational thinking of the traders. One among this biases is 'following or chasing trends'. The traders expect that they can predict the future even though the disclaimer says the opposite. Traders try to find validity by deducting patterns from the past trends. Most of these patterns are not reliable or already exploited. The market is more random and these patterns are already priced and exploited. The studies show that people who went after trends and pasta were the worst performancers.

Solution

The sensible solution to reduce the bias is by analysisng and running the risks of buying at the highs and put a time limit and retreat it's value. Another solution suggested could be Warren Buffet approach, is by buying when others are hesitant to buy and sell when all others confident