Behavioral Finance

Understanding behavioral economics will also help in making critical decisions like how much a person need to be saving, how much effort we need to put in our works and where we will choose to live in future.

I strongly advocate tactical asset allocation process and diversification over several different income and growth strategies. I believe that risk management and protection of investor's endowment are major objectives. In my portfolio, stocks may occupy a large portion and the

In October 29, 1929, the fate of the United States and the rest of the world completely shifted as one of the biggest economic downfalls in American history. An unstable banking system led to many Americans attempting to retrieve their money from the Stock Market until the overload eventually crashed the economy Tuesday, October 24 1929. Due to the impact of World War I , the Stock Market’s Black Tuesday brought many Americans during the 1920’s, years of worldwide economic downfall, as well as strong backflash that eventually led to World War II.

When people are asked how people will plan or rethink for retirement, the first thing that people will think about, is saving. There are some positive ways to save money, the author suggests to the readers to sign up for 401(k) plan. It is a plan help employees save for retirement, 401(k) should allow anyone to build up a nice nest egg. For example, “In Dave Ramsey’s The Total Money Makeover, for instance, he gives us “Joe and Suzy Average” who invest $7,500 per year ($625 per month) using their tax-free retirement account. They do this from age 30 to 70, getting 12 percent interest per year. At the end, they have $7,588,545 to their names.” When people invest in 401(k) plan, it is safer and more money in retirement and it also has a benefit that you don’t need to pay for tax when you take the money out. Beside 401(k), people prefer to invest money in the stock market for retirement-plan. According to author “ During a recent 40- year period,

Over the holidays, I had occasion to socialize with a group of very bright, successful people who are saving for retirement. We talked of many things, including their investments. And, sad to say, not one of them could coherently explain what he or she was doing, and why.

3. Then, those funds often are invested in mutual funds available inside the retirement plan.

Decisions, decisions, decisions. Everything in life entails making decisions, whether it be the decision to go back to school to pursue a higher education, deciding to eat cereal in the morning, or even reading this paper. Everything we do is based on decisions. Now, if you’re a computer, making decisions may be an objective task solely based on logic, but since we are humans, there are many factors that affect our decisions. These factors may be external, like the weather, but many are internal and may make an even bigger impact on our decisions than the external factors. Biases and errors are prime examples of influential internal factors and beliefs that affect the decision making process. This week our group discussed such biases and errors in decision making. We delved into the biases that affect us personally, like Anchoring Bias, Hindsight Bias, and Overconfidence Bias, as well as a few other biases.

     A good question was why were so many people in the United States invested in

In the mid of October, the fall started to begin when a frequent amount of people started to trade a numerous supply of shares totaling 12,894,650 in one day. Five days later, 16,410,030 shares were traded in the New York Stock Exchange in another single day, and after that, the economy started to tumble down. After the crash, the economy started to progressively get worse with the stocks in the early 1930’s only worth 20 percent of the value in the summer of 1929. Unemployment began to rise 4 years after the crash effecting 15 million people, which was 30 percent of the entire workforce. This also included over half of the United State banks receive bankruptcy and it wasn’t until 1939, when World War II began when the production of the stocks briefly started going

Challenges are presented to people on the daily basis. What to eat, drink, where they have to go, who they need to see, and etc... These things all impact the decision making process and the decisions made. In financial decision making, highly successful people do not make investment decisions based on past sunk outcomes, rather by examining choices with no regard for past experiences; this approach conflicts with what one may expect. In addition to past experiences, there are several cognitive biases that influence decision making.

Behavioural economics is the study of the effects that psychology has on the decision making of the economy. This tends to be the way that people think and feel when they are spending money on a certain good or service. The great economist Adam Smith was the first follower of this idea through his book “The theory of moral sentiments” which dates back to 1759. However, it took over 100 years to get a more clarified meaning of how big of a role the psychology of a buyer plays in economics. In behavioural economics there are seven basic principles which all contribute to the decision making process. Behavioural economics can explain how people will react to different situations such as times when there are no economic problems and times when

Some didn't learn from this stock market crash and let another crash occur October 19, 1987 in San Francisco though it didn’t have the same aftermath of the crash of 1929 it did begin a new era of volatility. The Americans that were affected by the crash of 1929 called

The biggest mistake the board of directors made was to trust a single man only because of his reputation. Just because Nick Leeson was reporting large profits, he was given virtually free rein and nobody had knowledge of his activity, when a trader on arbitrage strategies should not report such profits. The fact that Nick Leeson was reporting such profits should have been interpreted by the board of directors as a warning bell.

This perspective is about human behavior. This behavioral perspective is focus on the individual. This behavior is influenced by the environment and experience. Behaviorist is entirely completely negative psychological factors, the relationships between stimulate and response variable to explain behavior variable. This is because this is look like only one stimulate and response that can be observe. Therefore, only concerned variable stimulating reward or punishment, this is the way only to maintain or inhibit specific behavior. The new behaviorism and cognitive social learning theory is no longer ignore internal processes of the organism, it is concerned about the motivation and cognition research mechanisms, focus on research mediating variables between stimulus and response. Human beings not only through their own behavior to adapt to the environment, you can

Behavioural finance is a relatively new area of evolving research in finance. Behavioural finance seek to combine behavioural and cognitive psychological theory with conventional economics and finance to get a better understanding for why individual investors make irrational financial decisions.