BEHAVIORAL FINANCE AT THE NEXT LEVEL

When Thaler was awarded the noble for Behavioral Finance (BF), it is deserved or desired
for the work he done over period time for his contribution in economics, and exactly a
decade before that when Paul Krugman got it, everyone us who followed these prizes, are in
for bit of surprise, the noble committee by no means blind to the fact but, Krugman got it.
Then the obvious question comes to foray , as to why was he chosen, perhaps he deserve one
and if it so, it might have been one the for journalism, or the committee given some
instruction, that people in the committee might have “Behaved” out of compulsion to make
him an obvious choice for that year , since “worthy” committee decided to go ahead with
him, that he become choice for that year. He moved on and the committee did the same, for
now it is kind of dust and done with the him, the noble committee and humble economics
and no point in discussing on that either it could be that he deserved one or any but the
committee “behave” in time for his much “deserved” noble prize or award.

Introduction:
The first daunting word I have heard from my father is this word behavior and that continued
to haunt me for a while until I started to use it for my son, I have grown and perhaps my son
live with it for some time, but I found one thing very common finance, where do I go for
next holiday in summer break, it would again the same person, for I have no choice, I have to
approach him only and how my father react or behave to my inquest , in either case we have
behaved ourselves to the context at personal levels, and apply this word behavior to a
complex system called markets and it is an open suit, where it need to take beyond ordinary
people thought process, in the academic world these are very common theorize but, when you
want to apply it is very complex , it is natural in this word that given chance everyone want to
make money, to make money, there are number of theories that either been discusses and
written over million times, in choosing this our choice are very clear that BF, is still an area
where lot to be explored, in this paper we would like talk on structure or format that a typical
BF follows, since the topic rooted both in economics via-vis finance as its subset and of
behavior in the market place First, we will start with a comprehensive definition and
followed with general economics as deed. all falls under the larger set of economic domain,
and finally conclude on the topic.
DEFINITION:
A Behavioral finance is the study that is influenced by psychology, on the behavior of the
people who participate and analyze, who put subsequent efforts on markets. The Behavioral
finance helps in explaining why and how the markets behave or might influence in the
inefficient markets. Behavioral economics is subject long been studied, along with the related
sub-field such as behavioral finance, in way these studies have direct effects of
psychological, social, cognitive, and emotional factors on the economic decisions of which it
is influenced on individuals and institutions and the consequences that reflect market prices,
the they returns they expect, all are this effects for a proper resource allocation, though they
may miss the cart sometimes narrowly, but when talk in general, they have profound impact
of different kinds of behavior, it is a different experience and new environments, where
there are varying experimental values. By definition Behavioral economics are primarily
concerned with the boundaries of rational of economic agents. Increasingly Behavioral
models are integrated with the insights of psychology, neuroscience and microeconomic and
surprisingly with macroeconomics theories, while in doing so, these behavioral models are
covering a range of methods and are applied on various fields.

The studies show how behavioral economics/finance includes are influencing market, where
decisions with set information are making mechanisms which are appropriate to drive public
opinions and right choice for lager investments. In using the term "behavioral
economics/fiancé " in are being reflected in scholarly papers and articles has centrally gone
up many notches last few years, the studies have even shown that, the focus of these papers
mainly on three prevalent themes in behavioral finances such as Market inefficiencies,
Heuristics and Framing. It finally showing that behavioral finance is a subtopic of the broader
subject of behavioral economics.
Behavioral or behave in the name points at the behavior of the people who are participating
and are influencing the actual economy, what was fundamentally assumed by most
academics, is that these behavior studies are confined to mostly in theory and normally they
assumptions, in general people (Behavioralists) argued that the predictions of economics,
finance are mostly theoretical, they should be modified to make them account for, how people
actually behave in market place in given economic situations. What is now commonly
assumed is that in economics or finance rational and generally the implementation are
rational and most things are just an assumptions and that individuals generally fall in the
economy trap of utility function , which functions as a guide to make them happy. That
utility function values varies on the choices of a person who make himself subject to wealth
or income, that a rational person behavior is to maximizes utility which come from many
forms such as satisfaction, happiness and staying within the bounds of what is possible.

ECONOMICS:
Until "The Theory of Moral Sentiments," Smith proposed the idea of an invisible hand—the
tendency of free markets to regulate themselves by means of competition, supply and
demand, and self-interest. Two centuries before him , like gravity exits is proved by newton,
either gravity or the supply and demand are inconsequential to most people, economics may
or may not much effect on common but for the government and scientist they have live with
it, however when applied it is branched many sub topics and not many desired to be talk
about, one that is complex , other being for most it is not an important virtue, but, human
beings are have lived with it ever since he left his habitat, of it is interesting subject but, as to
scope of this paper it is limited context as requires.

Finance speaks numbers part of economy, what economy in theory is talks only about utils
part of it, while utils when quantified will the virtue of it. However subjective wise , it only
talked in the context of the supply and demand, of which part it directly or indirectly is
subjected markets , where this functions, keep changing to domain as context and where they
function, to provide some idea, where these markets and these domains are an endless array,
except for metals and diamonds , which are catered to exclusive people in selective markets,
while other fully influenced by these supply and demand. while in talking markets they are
mostly country specific, where confined economies doled on sensitive indexes and there is
never a day which keep a contact run, they keep either churning or people walk with some
profits only to come and for a other run, of where a change constant, It is the grave nature
of money and bullion markets, which are fought at much bigger scales economy, Keynes
economic models are not in modern economy, though the words supply and demands are
still there they are more of academic interest , of their charms is being slowly cornered, and
new theories are being employed on markets, one such thing is EMH.

It came exist sometime around middle of last century and in couple decades it completely
enticed as a profound theory, This term obviously mean different things to different set of
people but, Efficient Markets Hypothesis (EMH), is built on classical theory of finance, it is
in state that at any point of time the price of any or all assets and securities that are being
traded are correlated and it is developed as common knowledge or information (ideally )
available to every. That EMH assumes that every has same law and price for anyone who are
on the trading floor, what it is more, the markets are efficient and effective, what it means is
that there is only one price for any asset at given point in time. The whole idea it is being
treaded on correct price of an asset, is a neat and clean way of thinking. But, then the real
question comes, when it begs for an answer, weather one law and one price really exists.

BURTON and SUNIT(2013) the efficient market hypothesis (EMH) has to do with the
meaning and predictability of prices in financial markets. Do asset markets “behave” as they
should? In particular, does the stock market perform its role as economists expect it to? Stock
markets raise money from wealth holders and provide businesses with that money to pursue,
presumably, the maximization of profit. How well do these markets perform that function? Is
some part of the process wasteful? Do prices reflect true underlying value?

at first we need ask, is there any efficient markets exist, and if exits what are these “bubbles”
in stock markets? It is just not the numbers that folks, it is the severity of these bubbles that
are bursting, where markets trends changed in jiffy and in matter of few hours nay few
minutes billion of dollar are lost. In addition, we need to ask this question were, all these
people involved are taking a 100% rational decision towards markets? Given this as basis
where does EMH stands? And how much we have understood, the basically it is not
throwing an idea out the window, but, there should be some logic, as to when these markets
are functioning is there any idea for a common investor, was he a seasoned enough to
understand these changes or falling into that grave of loss on his/her treading, what we
understood is, as EMH, come to foray , that every investor will have same information as
any professional trader of investment banker. But traditional theories argues that “smart
money” investors, or those with the better understanding or the highest level of knowledge of
these markets, are the people who able counteract any change that is caused by that kind of
trade, though on one hand these words rational and irrational and subjecting them to these
new words called arbitrage and, in the last past few decades , that there is a mounting amount
of evidence is there that arbitrage process is not completely understood, but beginning in the
1980’s, finance theorists are consider the idea that the laws of investing was not quite as
clean as they had originally theorized. And, as technology is being widely used and more data
is being processed, this has made possible to analyze the mountains of data to prove these
original thoughts are not coming true. From the collective messiness in breakdowns of
traditional finance theory a new field within finance has bounced up and a new field with in
fiancé has been proposed and they named it aptly as

BEHAVIORAL FINANCE.
Behavioral Finance what is it ? like most question we ask these days there is no one suitable
focused answer, since most them need to be understood in the changing or evolving context
of finance, as was sited earlier, if the whole context is economics, that a finance is sub-theme,
which throughs us the challenge of how do we understand this context of finance from the
behavioral point of view or finance behaves as what we wish to be , before getting we need
to ask some basic questions.
 What was the need of behavioral finance, and which path it has taken to get form
inception to today?
 is the field of behavioral finance one-time solution for the struggling investor
markets?
 going ahead which path is this field of behavioral finance going take

LITERATURE REVIEW
To fully understand behavioral finance as it is today, one must first learn how it came to be.
Shiller (2003) helps readers take this first step as the author offers a great overview of the
behavioral finance’s evolution through the decades. In the 1980’s, the consistency of the
efficient markets model was starting to be challenged. One issue that troubled the efficient
markets complete acceptance was the problem of excess volatility. Several theories were
formed to describe the wide swings in stock prices, however it proved challenging to
reconcile the idea that a stock price was the present value of all future dividends (as most
finance theorists would argue) with the volatility observed in stock prices. This meant that
finance was either completely wrong about what made up the value for a stock, or investors
were not fully rational. Following this revelation, Shiller pushed the idea that markets might
be efficient on the micro level, but wildly inefficient on the macro level. In summary, this
means that individual stock movements make more sense than the movement of the entire
market. In the 1990’s, the amount of evidence contrary to efficient markets had become so
much that behavioral finance started to gain traction as a legitimate field.
Shiller then goes on to list several concepts that behavioral finance attempts to explain. The
first of which are feedback models. Feedback models attempt to show that when investors
trade, they actually often trade based off of other investors rather than off new information.
This can lead to inefficiencies and bubbles that traditional theory cannot explain. Another of
Shiller’s main concepts is the differentiation of smart money and ordinary investors. In the
Efficient Markets Hypothesis (EMH), it is assumed that smart money can fully offset any
noise caused by sub-optimal decision making, however according to Shiller this is not the
case in application. In the conclusion of his piece, Shiller stresses that the field at the time of
his writing (2003) was far from fully researched, but that there is more than enough evidence
to validate its existence and justify future research.
Complementing to Shiller’s piece Heukelom (2014) provides a comprehensive account of
how behavioral economics and finance were founded on the personal level. Behavioral
economics (which by many definitions includes behavioral finance) began largely as the
result of prospect theory as developed by Daniel Kahneman and Amos Tversky. Interestingly,
Kahneman and Tversky were both psychologists with no or little training in classical finance.
Prospect Theory proved useful to economics however, because it attempts to model the way
people actually make decisions as opposed to simply relying on the utility decision-making
strategies that made up finance theory. As Heukelom goes on to write, prospect theory argues
that people make decisions based on the potential value of gains and losses rather than the
utility of the decision. Richard Thaler, who was already a finance theorist at the time added
the economic and finance theory necessary to apply prospect theory to financial markets. All
three of these men, Amos Tversky, Daniel Kahneman, and Richard Thaler, are today
considered to be among the founding fathers of behavioral finance.
After the creation of several foundations and think-tanks, behavioral psychologists and
finance theorists began to join forces to research anomalies in financial markets as Tversky,
Kahneman, and Thaler were doing, and the result of this research was the creation of the field
of behavioral finance. Today, behavioral finance researchers are questioning even the most
basic of finance laws as researchers attempt to find out how investor biases and the limits of
arbitrage affect the efficiency of capital markets.
Given the totality of the evidence against EMH and the traditional finance paradigm, it is
hard to argue against the developments in behavioral finance. This is the crux of Olsen (2008)
as Olsen discusses how cognitive dissonance is the biggest problem between behavioral
finance and traditional financial theory. Cognitive dissonance is the resistance of holding two
ideas that are in conflict with one another, and accurately describes the problem of ascribing
to traditional finance theory while also believing in the proven facts of behavioral finance.
Because of its longevity and the fear that finance will regress to not being sound scientifically
if behaviorists have their way, traditionalists cringe at much of what behavioral finance has
argued about market inefficiencies. However, the fact of the matter is that work in many
fields has shown that many of the principles of traditional finance theory are not nearly as
concrete, as many would like them to be. Olsen argues that several broad themes of
traditional finance create the most cognitive dissonance. Among these is the idea that “the
human mind is a problem-solving device like a computer,” and that “emotions have a
negative influence on decision making because emotion is the antithesis of rationality.”
Overall, however, what Olsen concludes is that the amount of dissonance created from these
two separates but competing worlds of finance must be solved in one way or the other. He
also argues that the best chance for a resolution will likely
What was the need of behavioral finance, and which path it has taken to get form
inception to today?
why am I not participating in this money-making opportunity, you ask yourself? This
occurred with Internet stocks in the late 1990s and then with real estate during the subsequent
decade, and now back to the Internet bubble of the late 1990s with social networking
companies that are creating, in my view, another irrational valuation bubble that some
investors wish they could be involved with and, undoubtedly, someday will be glad they
never invested in. Once we look at the literature part, it is not so, easy answer this question
or statement, and we understood today markets tend to behave with time and number of
people who would want to make their share or lose the bounty, one question thou is the
financial markets gambling dens! One of the most common difference is risk, while in
gabling there is risk, there is no research or know that they were no studies seriously enough
that an inherent risk can be calibrated, thus we don’t see any patterner that says this trends for
the last few years or days and that we take that slot and pay for it and if you purely go theory
of uncertainty since there is no use cases that we can build a template on that one that is
summed as followed:
Michael( 2012) At one time or another we have all seen someone who epitomizes this type
of investor— or maybe this is our own behavior! These folks follow the latest trend, paying
no attention to valuation. They have no rational basis for making an investment and jump in
without an exit strategy, or they plan to get out when a profit has been made, if one is ever
made. The investment may go up, but since no plan is in place, the investment ultimately
turns sour and losses ensue.
Now the question need to be asked is stock markets or financial markets are gambling dens,
no to lager extent, the companies are supposed to give some information and how much they
seek from the markets and then there is this regulatory authority, while laws are there is no
law that it can control “humble” the human behavior, so then in the free markets individual is
a king or queen, depends on the ability to spend either with risk or risk free, both are give and
take in a functional information driven markets.
Given that they are not gamblers and educated, over period of when you or they watch trends
of either falls or gains at first would certainly understand the basic difference of the a den or
market place, there is both systematic loss or a gain and then this behaves, behaves as with
trends of markets and the people who tread in that markets, and when you take out that
instinct of gamble and induce the an approach or call it a behavior, it is understood that you
are here is take some legal money out of system or may lose, you may speculate on many,
while you behave with market:
Michael( 2012) As investors, we must resist the urge to participate in such schemes and steer
clear of these money-losing opportunities. Our own behavior is often the culprit, and we need
to overcome our natural instincts to participate in less-than-rational investment schemes, or at
least we should have an exit strategy if the decision is made to participate. Later in the book
we will look at individual behaviors that account for chasing returns, as has been described
here, and devise strategies for overcoming these behaviors.
Is the field of behavioral finance one-time solution for the struggling investor in the
markets?
No theory on the surface of earth provides one time solution, since there are multiple
question, it is obvious that as many question that you drive, it is in that context, one has to
strive for finding as many solution, the book of testament has no many question, where bible
has provided answers for the common sought, as we learn from the literature review, like
most subject or objects we are dealing toady are complex, it is a futile attempt to make for
such burgeoning problem as was the experts spoken of,
Pompian and Michael (2012) The fact is that if we are to fully understand how we as
individuals make decisions about investments and create profiles of various types of
investors, we need to take a step back and understand how the study of human characteristics
and traits has evolved over the years. This chapter aims to introduce the reader to the rich
history of thought and research in the field of personality psychology. Along the way you will
learn about some of the techniques used in this sub-discipline of psychology, as well as some
interesting facts about the psychologists whose theories will be reviewed and compared
below. Additionally, you will be introduced to the philosophical foundations of the relatively
young discipline of psychology.
Given this BF is no one time solution, probably one not be a surprise to any of you that the
study of personality is not an exact science (but you already knew that!). People are people
and hence are unpredictable, varied, and have a mix of traits that don’t always provide us
with a full understanding of why people make the behavioral decisions that they make
generally and how financial decisions are made, in particular. It is therefore incumbent upon
us to realize the limitations of the ideas presented in this book. A good portion of these ideas
is based on my own experience in dealing with clients over a more than 20-year career,
surveys I have given to investors who may or may not give a complete picture of their
behavior and/or may not fully understand their own behavior consistently, and research of
others that demonstrates that investor behavior cannot be understood with precision. With
that as a backdrop, we will delve into the history of personality and some theories of
personality.
Bachmann, Kremena(2009)In general, understanding the client means understanding the
essence of his individual needs. Although needs are, by their nature, an individual
circumstance and thus unique, most advisors try to reach a certain degree of standardization
in order to keep the complexity of the advisory process low. One simple mechanism is to
build different segments of clients. Clients within a segment build a homogenous group with
similar needs and expectations toward the services of their advisor. Possible criteria are:
While clients’ wealth is important as a factor to help banks to differentiate clients and
determine the intensity of the advisory relationship in each segment, wealth is less helpful to
understand clients’ needs and differentiate between clients’ preferences. In fact, most
economic models within traditional finance suggest the same solution for clients since
preferences do not depend on their wealth. In other words, if the clients do not differ with
respect to their aversion toward uncertainty, which is the main feature of their preferences,
they should also receive the same advice independently on their wealth. Hence, to understand
the clients’ needs, advisors should take a closer look at the determinants of clients’
preferences and the drivers of clients’ financial decisions.

going ahead which path of this field of behavioral finance going take
they say time is one factor of which we have no control that, time pass by we are slowly
sliding into history, today world trying to phase with the time, but, there is so much we have
achieved, yet the fact is that, that so much is relative to fact that, we so much more to do! In
the last three decades there is a lot of work done on BF, however at frequent intervals, you
get one fide, weather is perfect for a productive day ahead, news are abuzz, that US air force
raided some island which is of the cost of Patagonia, where Russians have strong hold for the
oil to explore, what it has to do with it, some 10 people dies and one was pilot captured, then
news flash NYSE down by 500 basis points, so until yesterdays close your value of share or
instrument is jumping, you lost your net worth by 57%, you have been following or trying
emulate EMH, for ages but, you followed your instinct’s looked the BF model, till that
moment of news, you and BF good, but now of it is have guts to follow your physiology and
vet your knowledge on the markets, no theory can be perfect and no theory can be trusted, as
the theories follow some model, and models are just assumption at the best. As to where it is
going to be in future, the Road ahead written by “Gates” still holds, prima facie as of now it
is going to be there until we are going to find next Nobel Laureate.

CONCLUSION:
We are not writing book, since it first sited four decades or there about, for some people
might have taken fancy, does the theories are going to hold any good, for anything other than
nature, rest whatever human created are just estimates at the best, nature has defined some
deeds of which our founding father scientists are able to size complex nature problem to
kneel, it is hard work and but, they proved right time and again, they are not paranormal but,
a phenomenon, anything that man made are able to sooth his ego, for the times he lives, every
other thing or thigs need to need to talked in context, it is human the position rich or poor,
live in same context of economics and when die leave no trail of he live rich or poor, but man
derived these words, and havens or hell blessed us something brain, and each brain behaves,
and behaves according to I won’t call it place but, circumstances and they have defined what
we need to have a square meal, for as long as survives, if the theory of BF make him good, let
him apply and control his behavior and keep faith in finance, if we ask BF is going to be there
and it is obvious, as the AI advanced and are being applies for the future prediction and BF
definitely will move to next level

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