|Track 16: Behavioral Finance & Economics|
Prof. K P Narwal
GJ University of Science and Technology
Dr. Shanti K Maji
North East Hills University
|Brief Description of The Track|
Scope of the Behavioral Finance and Economics Track includes-
a. The Central assumption of the traditional finance model is that people are rational. Standard Finance theories are based on the premises that investor behaves rationally and stock and bond markets are efficient. Traditionally, economics and finance have focused on models that assume rationality. The behavioural insights have emerged from the application in finance and economics of insights from experimental psychology. Behavioural finance is relatively a new field, which seeks to provide explanation for people’s economic decisions. It is a combination of behavioural and cognitive psychological theory with conventional economics and finance. Inability to maximize the expected utility of rational investors leads to growth of behavioural finance research within the efficient market framework. Behavioural finance research is an attempt to resolve inconsistency of Traditional Expected Utility Maximization of rational investors within efficient markets through explanation based on human behaviour. For instance, Behavioural finance explains why and how markets might be inefficient.
b. Behavioral finance combines insights from economics, finance and psychology. Its insights are of growing importance to financial advisors in serving clients. There are many universities in India and abroad that offer various programs in the field. In addition, each offers a promising career with lucrative options. It is a specific sub discipline within the field of economics, at the intersection of traditional economics and the broader social sciences. Markets frequently display behaviors that cannot be adequately explained by conventional economic theory, and behavioral finance attempts to interpret these variations by applying sociological and psychological factors to their analysis.
c. Even within the world of economists, specialists in behavioral finance occupy a rarefied position. Their contributions to the understanding of market behavior have wide-reaching implications for the field as a whole, and indirectly affect the lifestyles of millions of people and may lead to a career in academia, performing pure research and educating the next generation in the discipline. Graduates may also find work with the federal government, investment banks or major brokerage firms and even NGOs and international agencies. Behavioral finance is the study of these and dozens of other financial decision-making errors that can be avoided, if we are familiar with the biases that cause them.
d. As the financial economists were assuming that people (investors) behaved rationally when making financial decisions, psychologists have found that economic decision are made in an irrational manner, so they challenge this assumption of standard finance. Cognitive error and extreme emotional bias can cause investors to make bad investment decisions, thereby meaning that they act in irrational manner. Over the past decade, field of behavioural finance has evolved to consider how personal and social psychology influence financial decisions and behaviour of investors in general.
e.The finance field was reluctant to accept the view of psychologists who had proposed the behavioural finance model. Behaviour finance was considered first by the psychologist Daniel Kahneman and economist Vernon Smith, who were awarded the Nobel Prize in Economics in 2002. This was the time when financial economist started to believe that the investor behaves irrationally. Human brains process information using shortcuts and emotional filters even in investment decisions. Hence, Behavioural Finance is an attempt to explain how the psychological dimensions influence investment decisions of individual investor, how perception influences the financial markets as a whole.
We invite quality research papers to explore the areas of Behavioural Finance and Economics during this INDAM 2020 conference.