...Course Number: FINA 6278 - MSF Program 11 / 07 / 2012 Course title: Financial Theory and Research (Part 1 – Financial Markets and Asset Pricing) Team Member: Haotian Lin; Nan Bai; Wenyi Gu; Yibo Zang Summary Standard finance (modern portfolio theory), compared with Behavioral finance, is no longer modern: dating back to the late 1950s modern portfolio theory was developed (Statman 2008) Behavioral finance offers alternative explanation for investors and markets. Behavioral finance, which has been a controversial subject and is becoming more widely accepted, is finance from a broader social science perspective including psychology and sociology (Shiller 2003). Behavioral finance helps identify the financial market’s inefficient reaction to public information, which cannot be explained by traditional financial models with assumptions such as expected utility maximization, rational investors, and efficient markets (Ritter 2003; Statman 2008). Statman (2008) compares “normal” investors and rational investors by pointing out the difference that normal investors are reluctant to realize losses since normal investors are affected by cognitive biases and emotions. Statman also compares Behavioral Portfolio Theory and Markowitz mean-variance theory. Another comparison made by Statman is between Behavioral Asset Pricing Model (BAPM) and capital asset pricing model (CAPM), stating that the asset pricing model of standard finance is moving away from CAPM toward Fama...
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...participants make decisions? How do these decisions affect the financial markets? With the financial markets in Asia being the largest in the world, such an interesting environment with participants displaying different levels of capitalism, financial market experience and knowledge, Asia is definitely a fertile ground for the study od behavioral finance. According to conventional financial theory, the world and its participants are, for the most part, rational "wealth maximizers". However, there are many instances where emotion and psychology influence our decisions, causing us to behave in unpredictable or irrational ways. Asians in general suffer from cognitive biases, more so than Westerners, often being viewed as ‘Gamblers. Behavioral finance is a relatively new field that seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions .It calls for investigation into higher mental processes, memory, perception, problem solving and thinking .This paper looks at some of the anomalies (i.e., irregularities) that conventional financial theories have failed to explain. In addition, review underlying reasons and biases that cause some people to behave irrationally. 2.- Brief survey of the literature The following areas of research have been covered, from the mid 1980’s to the main focus of the article(special edition 2008): Overreaction and Availability Bias, Overconfidence...
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...argue that it provides more accurate cost data needed to make appropriate strategic decisions about product mix, sourcing, pricing, process improvement, and evaluation of business process performance. These claims have led many firms to adopt ABC systems [8]. The benefits of ABC and its positive impact on firm’s performance motivated a numerous studies which examined various aspects of ABC. Among such studies are McGowan [11] who assessed the integrity of ABC success, Innes and Mitchell [4, 12] and Yanren [13] who conducted research on factors affecting ABC adoption, and Shield [3], Shields and McEwen [14], Gosselin [15] and Baired et al.[16, 17]who concentrated on factors influencing ABC success especially at the implementation stage. However, there is mounting evidence that suggests most of firms are experiencing problems in implementing ABC and, in some extreme cases, ABC implementation is not successful [3], which later resulted in abandoning the ABC systems altogether [15]. Questions arise as to why ABC implementation is successful in certain companies and fails in others. Based on the contingency theory, researchers have argued that the reasons for different degrees of ABC success could be due to the different contextual factors faced by each firm. These have led researchers to recognize assessing factors that influence ABC success implementation as an important research area. The following are among the...
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...argue that it provides more accurate cost data needed to make appropriate strategic decisions about product mix, sourcing, pricing, process improvement, and evaluation of business process performance. These claims have led many firms to adopt ABC systems [8]. The benefits of ABC and its positive impact on firm’s performance motivated a numerous studies which examined various aspects of ABC. Among such studies are McGowan [11] who assessed the integrity of ABC success, Innes and Mitchell [4, 12] and Yanren [13] who conducted research on factors affecting ABC adoption, and Shield [3], Shields and McEwen [14], Gosselin [15] and Baired et al.[16, 17]who concentrated on factors influencing ABC success especially at the implementation stage. However, there is mounting evidence that suggests most of firms are experiencing problems in implementing ABC and, in some extreme cases, ABC implementation is not successful [3], which later resulted in abandoning the ABC systems altogether [15]. Questions arise as to why ABC implementation is successful in certain companies and fails in others. Based on the contingency theory, researchers have argued that the reasons for different degrees of ABC success could be due to the different contextual factors faced by each firm. These have led researchers to recognize assessing factors that influence ABC success implementation as an important research area. The following are among the...
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...Chapter 9 Behavioral Finance and Technical Analysis The effiecient market hypothesis makes two important predictions. First, it implies that security prices properly reflect whatever information is available to investors. Second, active traders will find it difficult to outperform passive strategies such as holding market indexes. A relatively new school of thought dubbed behavioral finance argues that sprawling literature on trading strategies has missed a larger and more important point by overlooking the first implication of efficient markets-the correctness of security prices. Behavioral finance are models that emphasize potential implications of psychological factors affecting investor behavior. Its premise is that conventional financial theory ignores how real people make decisions and that people make a difference. A growing number of economists have come to interpret the anomalies literature as consistent with several “irrationalities” that seem to characterize individuals making complicated decisions. 2 Broad Categories: 1. Investors do not always process information correctly and therefore infer incorrect probability distributions about furture rates of return. 2. Even given a probability distribution of returns, they often make inconsistent or systematically suboptimal decisions. Information Processing Errors in information processing can lead investors to misestimate the true probabilities of possible events or associated rates of return. Forecasting errors...
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...ABSTRACT Behavioural finance is part of finance that seeks to understand and explain the systematic financial market implications of psychological decision processes. It utilizes knowledge of cognitive psychology, social sciences and anthropology to explain irrational investor behavior that is not being captured by the traditional rational based models. INTRODUCTION Classical investment theories are based on the assumption that investors always act in a manner that maximizes their return. Yet a number of research show that investors are not always so rational. Human become puzzled when the uncertainty regarding investment decision engulfs them. People are not always rational and markets are not always efficient. Behavioral finance explains why individual do not always make the decisions they are expected to make and why markets do not reliably behave as they are expected to behave. Recent research shows that the average investors make decisions based on emotion, not logic; most investor’s buy high on speculations and sale low on panic mood. Psychological studies reveal that the pain of losing money from investment is really three times greater than the joy of earning money. Emotions such as fear and greed often play a pivotal role in investor’s decision; there are also other causes of irrational behavior. It is observed that stock price moves up and down on a daily basis without any change in fundamental of economies. It is also observed that people in the stock market...
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...Which features of organizations do managers need to know about to build and use information systems successfully? What is the impact of information systems on organizations? Define an organization and compare the technical definition of organizations with the behavioral definition. Students can make use of Figures 3–2 and Figure 3–3 in answering this question. The technical definition defines an organization as a stable, formal social structure that takes resources from the environment and processes them to produce outputs. This definition of an organization focuses on three elements: Capital, labor, and production and products for consumption. The technical definition also implies that organizations are more stable than an informal group, are formal legal entities, and are social structures. The behavioral definition states that an organization is a collection of rights, privileges, obligations, and responsibilities that are delicately balanced over a period of time through conflict and conflict resolution. This definition highlights the people within the organization, their ways of working, and their relationships. The technical definition shows us how a firm combines capital, labor, and information technology. The behavioral definition examines how information technology impacts the inner workings of the organization. Identify and describe the features of organizations that help explain differences in organizations’ use of information systems. Common features for organizations...
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...establish a relationship between top management team demographic characteristics and firm outcomes. However, empirical results have been inconsistent. Certo, Lester, Dalton and Dalton (2006), after conducting a meta-analysis of several studies, found modest support for a direct relationship between TMT demographic indicators and firm performance, but indicated moderating influences. Hambrick (1994) provided the main argument against TMT research based on demographic characteristics. According to him, this line of inquiry pays “too little attention to the actual mechanisms that serve to convert group characteristics into organization outcomes” (p. 185). Recent research on strategic leadership, trying to overcome these mixed findings, has begun to change focus away form TMT characteristics and concentrate on the processes underlying TMT decision making (functioning) such as comprehensiveness, consensus, social integration, conflict and decision speed (Certo et al., 2006). Lubatkin et al. (2006) and Carmeli and Schaubroeck (2006) present good examples that, when processes were measured directly, they were a stronger predictor of organization outcomes and performance than demographic characteristics. Among the recent studies of TMT processes, the concept of behavioral integration (Hambrick, 1994) has received particular attention (Simsek et al., 2005). As defined by Hambrick (1994), behavioral integration is a meta-construct that aims to capture team’s social and task processes...
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...growing discussion in leadership literature (Popper & Mayseless, 2002) as cited in Avolio. Many companies, which were small 20 years ago have emerged as leaders in the market, overtaking their once larger competitors. These firms internally have revamped the way they do business. They have focused on making changes to their managerial process, thereby creating a competitive advantage (Tichy & Devanna, 1990). The authors go on to say that although traditional managerial skills are important they are not sufficient to bring about organizational transformation. Transformational change will come by incorporating new strategies about people and the structure of the firm. These strategies may include leadership models or theories. A number of leadership models or theories exist, which address change in the way a firm addresses the management of its employees. The contingency view of leadership states there is not a particular model of leadership that is better than another, but rather various situational contingencies determine the success of different types and styles of leadership (Nahavandi, 2006). Of the many number of leadership models four are notable for change. These four consist of trait theory, behavioral theory, charismatic approach to leadership, and the cognitive resource model. A discussion of how each model addresses contemporary leadership issues and challenges follows. The trait approach to leadership has been referred to...
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...Narver and Slater’s scale (MKTOR) for market orientation, Weerakoon’s Multi-Model Performance Framework (MMPF) for business performance and Technology Acceptance Model (TAM) for website adoption are tested and used. Confirmatory factor analysis was used to validate the measures in the study. Regression analysis was performed to determine whether market orientation is associated with firm’s performance and website adoption using the Partial Least Square (PLS) technique. Our findings suggest that market orientation is affecting business performance in both sample groups, while Iranian SMEs with higher levels of market orientation are more willing to use website as a business tool in comparison with firms with lower level of market orientation. In website adopters sample group, behavioral intention, perceived usefulness and perceived ease of use has positive direct effect on website...
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...organizations. The purpose of the study is to improve relationships in organizational context and therefore improve the process of achieving the organizational goals and objectives. Definition of organizational behavior “Actions and attitudes of individuals and groups toward one another and toward the organization as a whole, and its effect on the organization's functioning and performance.” Evolution of Management theory Behavioral science approach This Approach focuses on the psychological and sociological processes that influence the performance of workers. This approach focuses on the workers, not the job itself. The behavioral science was influenced to a large extent by the human relations movement, namely the Hawthorne experiments (e.g. influence of lightning on performance etc.) in the 1930s. Human relations approach The human relations approach evolved in the 1960s and included research from Herzberg, Maslow, and McGregor etc. They tried to find ways to motivate employees based on their needs. 1. McGregor X and Y theory McGregor stated the XY theory of management that says that there are two types of management approaches. A type Y manager sees people as individuals with intrinsic motivation to achieve the organizational goals. Therefore the job of the manager or leader is it to facilitate this motivation and to develop a working environment to nurture that motivation. A type X manager beliefs that people are lazy and work only if they are threatened by punishment...
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...of locating and retaining employees around the business world has recognized this as “War for Talent”. This field of management is also termed as the Human Capital Management. 1. Provide a brief description of the status of the company that led to its determination that a change was necessary. The Avon Products, Inc. is one among the popular American based organizations dealing in personal care manufacturing and seller firm (Groysberg, 2006). The Avon Products, Inc. is a multinational organization operating in almost 140 countries around the globe with sales revenues from its operations more than $ 10.8 billion during last fiscal year. The Avon Products Inc. is the world’s largest firm selling its products directly and is standing at fifth spot among the firms dealing in beauty and care products (Gardner, 2003). In order to achieve subject study the Case Study of Avon Products is selected and analyzed while including brief description of firm’s status which has been led to determination of changes found necessary, identification of model for change theory, identifying and investigating the types of evaluation information collected and speculation about success of changes within five years. Finally this paper includes how the adjustments could be made in the...
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...of the theory of planned behavior Master Thesis Sofia Karali 357726 Supervisor: Pr. Dr. Roy Thurik Erasmus School of Economics Co-reader: Hendrik Halbe MSc Erasmus Centre for Entrepreneurship Erasmus School of Economics Rotterdam 2013 Abstract Though many researchers have focused on entrepreneurship education, little research has been conducted on the precise effects and overall effectiveness of the entrepreneurship education programs. Drawing on the theory of planned behavior, this study investigates the impact of entrepreneurship programs on the entrepreneurial intention of students in higher education in the Netherlands. Data for this study is drawn from GUESSS (an international project investigating the entrepreneurial spirit of students worldwide). The results show that participants of entrepreneurship education programs are more likely to have higher intention (right or five years after their studies have been completed) to found their own businesses compared to nonparticipants. Furthermore, attitude toward entrepreneurship, subjective norm, and perceived behavioral control mediate the aforementioned relationship. The findings of this report contribute both to the Theory of Planned Behavior and to the field of entrepreneurship education. 1 Contents Acknowledgements 1. Introduction 2. Literature Review & hypotheses 2.1 Entrepreneurship as intentionally planned behavior 2.1.1 Intention models 2.2 Theory of Planned Behaviour (TPB) 2.2.1 The theory of planned...
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...THEORIES IN MARKETING STRATEGY[1] In general, there are three aspects to the strategy of firms, regardless of the level of the strategy: content, formulation process, and implementation. Strategy content (what the strategy is) refers to the specific relationships, offerings, timing, and pattern of resource deployment planned by a business in its quest for competitive advantage (e.g., generic strategy of cost leadership versus differentiation; push versus pull strategy). Strategy formulation process (how the strategy is arrived at) refers to the activities that a business engages in for determining the strategy content (e.g., market opportunity analysis, competitor analysis, decision-making styles). Strategy implementation (how the strategy is carried out) refers to the actions initiated within the organization and in its relationships with external constituencies to realize the strategy (e.g., organization structure, coordination mechanisms, control systems). The body of marketing literature termed as strategic market planning primarily focuses on the content of strategy and process of strategy formulation at the business unit level and the corporate level, and the role of marketing in these spheres of organizational activity. Firms initiate strategic actions to achieve competitive advantage. However, these actions are shaped, and their outcomes influenced, by the external environment and internal environment of the firms. Institutional theory suggests that the actions...
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...Leadership Theories Many different people attempt to take on the role of a leader but not many have the leadership skills needed to be a successful leader. Some have a natural talent of being leaders those are the ones you say were born to lead. Others are molded into leaders. Three motivational theories I chose to do research on are: Trait Theories Trait theories are based on the past and present characteristics of leaders. Trait theories help to examine the effectiveness of leadership skills helping to predict the success of a leader based on their known traits. Successful leaders definitely have interests, abilities, and personality traits that are different from those of the less effective leaders. Through many researches conducted in the last three decades of the 20th century, a set of core traits of successful leaders have been identified.("Trait Theory of Leadership" 2008-2012) Successful leaders show traits such as self confidence, honesty, integrity, charisma, knowledge of the business and high ambition. Being a leader does take a special skill set that not everyone posses. Leaders gain the respect of others and have that ability to influence others in doing as they communicate. A leader will set a path for his constituents and make sure that they stick to that path and successfully accomplish their mission. Countries such as the Middle East and Africa where men are the dominant leaders are examples of the trait theory. Behavioral Theories Unlike trait...
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