...From Efficient Markets Theory to Behavioral Finance 1. What does Shiller mean by Behavioral Finance? Behavioral Finance is the collaboration between finance and other social sciences. This field of research is focused on determining the precise degree to which various market forces—including rational analysis of company-specific and macroeconomic fundamentals; human and social psychology; and cultural trends—influence investors’ expectations and determine their level of confidence or fear. Behaviorists believe that at times, the real determinants of stock market movements are the forces of human and cultural psychology, oranimal spirits (a term coined by economist John Maynar 2. How does Behavioral Finance contrast with Efficient Market Theory? Behavioral finance takes issue with two crucial implications of the EMH: (1) that the majority of investors make rational decisions based on available information; and (2) that the market price is always right. Behaviorists believe that numerous factors—irrational as well as rational—drive investor behavior. In sharp contrast to efficient markets theorists, behaviorists believe that investors frequently make irrational decisions and that the market price is not always a fair estimate of the underlying fundamental value. Still, many proponents of behavioral finance agree with at least one implication of the efficient market theory—that it’s not possible to reliably earn abnormal returns. 3. What prediction does Efficient...
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...Cognitive-behavioral theories are usually brief and target medical symptoms rather than personality issues. Through the use of active techniques and psycho education, cognitive-behavioral therapy changes behaviors and cognitions. Due to cognitive-behavioral approaches relying heavily on psycho education, the role of the social worker is to educate clients on maintaining a healthy standing, mentally and behaviorally. Cognitive-behavioral theories are based on the idea that our feelings, thoughts, and behavior are all connected. Cognitive-behavioral approaches integrate both behavioral and cognitive approaches in order to change thoughts, feelings, and behaviors. Behavioral approaches use classical conditioning, operant conditioning, and social...
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...Cognitive and Behavioral Treatment Therapies Many people have a misinformed or misguided view of what psychological therapy consists of. This stigma may stem from many of the old-fashion treatments shown on TV and movies. For instance, on TV, psychotherapy may allude to involving dream interpretation or an in depth discussion detailing an individual’s past child hood experiences. Psychotherapy has made tremendous strides since then. Cognitive and Behavioral therapist are usually short term treatments that focus on arming the client with specific skills that are essential to their success. The basis of cognitive therapy is that thoughts have the ability to influence individual’s feelings. One’s emotional response to a situation can be derived from their interpretation of the situation. For example, you experience the sensations of your heart racing and shortness of breath. If these physical symptoms occurred while you were lying quietly in your bed while watching television, the symptoms would more than likely be attributed to a medical condition, such as a heart attack, leading to fear and anxious emotions. In contrast, if these same physical symptoms occurred while running through the park on a beautiful afternoon, they would not be attributed to a medial ailment, and would likely not lead to fear or anxiety. Different interpretations of the same sensations can lead to entirely different emotions. Cognitive therapy suggests that a great deal of our emotions are due...
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...Behavioral Theories Leadership is the process of influencing others toward achievement of goals. In leadership there are more than one theory that can describe the process of leadership and the styles of the leaders. Behavioral theories are from leadership theories that differentiate between the effective leaders from ineffective leaders. Behavioral Theories are included three studies, which are: * University of Iowa Studies * The Ohio State Studies * University of Michigan Studies A bout the first studies, University of Iowa Studies, these studies is talking about three leadership behaviors or styles: Democratic, Autocratic and Laissez-faire. A leader with Democratic style tends to involve employees in decision making, encourage participation in deciding work methods and goals, and use feedback as an opportunity to coach employees. A leader with Autocratic style tends to centralize authority, dictate work methods, make unilateral decisions, and limit employee participation, and there is huge degree of dependence on the leader in making decisions. A leader with Laissez-faire style generally gives his or her employees complete freedom to make decisions and to complete their work in whatever way they see fit, without interfere from the leader. The second study in the behavioral theories, the Ohio State Studies. It has two dimensions: * Consideration: Being consideration of followers’ ideas and feelings, and to be a relationship characterized by trust...
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...approach about the firm. Now going through the author’s major theory which has the basic models: The Organizational goal, Expectations and decisions of an organization and Relational concepts. The goal of an organization The authors’ state that individual person has goal, as an organization they do not. However, if the theory is to be well defined, there is need for a goal for the organization, or a corresponding equivalent to that of an individual. The authors adopt a series of independent constraints forced on the organization through negotiation among the bloc members and adjusted over time in response to strains within. For the goal analysis, the authors adopt two organizing devices. The first setoff exhaustive variables influencing the dimensions of the goal while the second set of relational concepts influences the aspiration on a particular goal. The second set is made of past performances, goals of the organization and of others. Though the author state conflicting goals exist in firms, they do not solve the problem given that for maximization problem we can use Lagrange Multiplier or constraints to the objective function directly. Expectations and decisions of an organization According to the authors expectations are the result of inferring from the available information and therefore a good theory should consider the avenue by which information is availed to the firm. Due to the absence of game theory during the writing of this book, the authors examine only...
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...Vestal Ethical Theories and Behavioral Traits Ethics 316 LARRY FRAZIER Eight July, 2013 What is your theory regarding the ethical beliefs and morals of the people in your everyday life? There is no right or wrong answer to this question because who is to say that one ethical theory or moral behavior is better than another individuals ethical theory or moral behavior? This paper will address the three main ethical theories, Virtue theory, Utilitarianism, and Deontological and define them by providing examples of their similarities, and differences. Last this paper will identify how each theory addresses both ethics and morality and the Pros and Cons for each. According to New Yourks Saint Martins Press, 1998, each theory emphasizes different aspects of an ethical dilemma that lead to the most ethically correct resolution according to the guidelines within the ethical theory itself. The first Theory is the Virtue Theory and it is best defined as someone who’s character is pure and good and they naturally strive to do good by all people and they value other peoples well being as much as they value their own. This is a learned trait, but can be achieved by everyone if taught to put good out in the world, not for self gratification but instead because it’s morally right to do so. Unlike the deontological theory, the Virtue theory performs good deeds naturally and without regard to it being their duty to do so. But the negative aspect to this type of theory is that the decision...
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...One psychoanalytic theory that I believe would impact and benefit Lester would be the Cognitive Behavioral Theory. The reason being is helping Lester learn to manage many of the symptoms related to his perhaps PTSD, would greatly assist in his coping mechanisms and hopefully help to decrease the hypervigilance, mistrust, and agitation. I also believe if Lester became more aware of his feelings, thoughts, and behaviors, he may be able to reflect and realize what may be triggers and set goals to combat the emotions felt when dealing with police. As an African American man, being discriminated and targeted has major effects on encounters with police. The Cognitive Behavioral Theory can hopefully allow Lester to better understand how his symptoms...
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...Theories | Theories Explanation | NAEYC Standards pertaining to Theories | Theories and best teacher practices | Psychoanalytical | “Explain child development through psychological states with tensions or conflicts inherent to each stage (GCU, 2014)”. | Encouraging Learning and child development - Standard 1 | Teaching practices that are culturally diverse | Behaviorist | Is a theory of learning based upon the idea that all behaviors are acquired through conditioning. | Family and community relationships being built- Standard 2 | Having visual aids to help students and teacher having individual time with student. | Maturational | “Explain child growth and development from the perspective of a natural progression of biological and children mature according to their genetic (GCU, 2014)”. | Approaches that connect children and families that are developmentally appropriate- Standard 4 | Preparing students for school by keeping them healthy and teaching them what they need to know. | Constructivist | “Emphasize that children gain knowledge primarily through interaction with the world (GCU, 2014)”. | Constructing Community and family Relationships- Standard 2 | Children learn through play using developmentally appropriate tools. | Contextualist | “They emphasize the role of the environment in child development. They differ in that contexualists focus on the experiences of the child in relation to other people, the physical environment and the sociohistorical context...
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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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... MA 02139, USA dprelec@mit.edu Abstract Neuroeconomics uses knowledge about brain mechanisms to inform economic theory. It opens up the ‘‘black box’’ of the brain, much as organizational economics opened up the theory of the firm. Neuroscientists use many tools—including brain imaging, behavior of patients with brain damage, animal behavior and recording single neuron activity. The key insight for economics is that the brain is composed of multiple systems which interact. Controlled systems (‘‘executive function’’) interrupt automatic ones. Brain evidence complicates standard assumptions about basic preference, to include homeostasis and other kinds of state-dependence, and shows emotional activation in ambiguous choice and strategic interaction. Keywords: Behavioral economics; neuroscience; neuroeconomics; brain imaging JEL classification: C91; D81 I. Introduction In a strict sense, all economic activity must involve the human brain. Yet, economics has achieved much success with a program that sidestepped the * We thank participants at the Russell Sage Foundation-sponsored conference on Neurobehavioral Economics (May 1997) at Carnegie-Mellon, the Princeton workshop on Neural Economics (December 2000) and the Arizona conference (March 2001). This research was supported by NSF grant SBR-9601236 and by the Center for Advanced Study in Behavioral Sciences, where the authors visited during 1997–1998. David Laibson’s presentation at the Princeton conference was...
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...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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...in part by Heineken. In this report you will read about a novel concept in economics called the Three Pillar Model, with a particular focus on the pillar of entities. After a general introduction, specific information about the beer market will be given. This is followed by a short analysis of the company Heineken NV, a Dutch beer brewer operating in over 170 countries worldwide. To end the report a conclusion will be given. This is followed by, which will include among other things the recommendation to create a strong bond with the consumer. In the very end you will find a list of all the sources that were used to write this report. Contents Abstract 1 Introduction 3 1. Literature review 4 1.1 Three pillar model 4 1.2 Theories 4 1.2.1 Neoclassical economics 5 1.2.2 Institutional economics 6 1.2.3 Behavioural economics 8 1.3 Entities 10 1.3.1 Institutions 10 1.3.2 Organizations 10 1.3.3 Individual Actors 10 1.3.4 Trends 11 1.4 Paradigms 11 2. Methodology 13 3. Industry specific investigation 14 3.1 A brief history 14 3.2 Institutional characteristics 16 4. The company: Heineken NV 19 Conclusions 20 Recommendations 21 Bibliography 24 Introduction In front of you is a report written for the International Business School, Hanze University of Applied Sciences,...
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...Efficient Market Discussion and Understanding of Finance As the 2013 Nobel Laureates in economic science, both of Eugene Fama, from the University of Chicago and Robert Shiller, from Yale University, have made famous contribution to the finance world. Even though their views toward market efficiency seem mutually contradictory, their theories has been highly valued by the finance academia as well as industry. This paper compares and contrasts the work of both of them and discusses how their work influence my understanding of finance. Fama is known for his work in initiating and developing the “efficient market hypothesis (EMH).” In his paper, Fama defines “efficient market” as “a market in which prices always fully reflect available information” (Fama 1970). If prices did reflect all available information, trading rules and fundamental analysis would not help investors to constantly earn abnormal return. This proposition has been checked by others and himself in the following papers: "Random Walks in Stock Market Prices (Fama 1965)," and "Filter Rules and Stock Market Trading Profits" (Blume, Fama 1966). Stock prices react to new information so quickly that it is almost impossible to trade on that piece of new information and profit from it. Furthermore, investors cannot earn abnormal returns without taking more systematic risk. To address the different types of information that stock prices could reflect, Fama prosed three types of market efficiency: (1) strong-form, where...
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...market-forecasting newsletter. Mr. Fama realized that human beings were working with strategies that didn’t quite work out. Fama wrote in his 1965 paper “In an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.” This meant that the stock prices were changing everyday and there was no real was to predict what a stocks actual price would be in the future. Efficient market hypothesis is very controversial and often times people go against the theory. In 1191, Famas theories began to fade away. Fama began to realize that there was no possible was that the market was efficient enough to predict the price of a stock or search for an undervalued stock. A good example would be when the economy goes into a recession. There was no possible way to predict that the economy would take a down turn so fast. On the other side of the fence is the behaviorist group of economists. The behavioral finance concept is based on rational theories. The thought process is that people behave rationally and predictably. Richard Thaler, a member of the “behaviorist”school of economic thought changed this vision. He expressed concern that people tend to make irrational or stupid decisions. Thaler collected much evidence that people constantly made irrational decisions that made absoluetely no sense financially. One of his examples was a tennis player who kept playing tennis with a bad elbow even just so he...
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...Technical analysis involves identifying crowd behavior in order to join the crowd and take advantage of its momentum and direction. This is called the bandwagon effect. Here’s how a bandwagon works: A fresh piece of news comes out, a majority of traders interpret it as favorable to a security, and buying overwhelms selling so that the price rises. You profit by going with the flow. Then when everyone is jumping off the bandwagon, you jump, too. As market participants get excited about a security, they become increasingly bullish and either buy for the first time or add to positions, a phase namedenamed accumulation. When traders become disillusioned about the prospect of their security price rising, they sell, in a phase named distribution. To buy 100 shares of a stock is to enter a position. To buy another 100 shares for a total of 200 is toadd to your position. If you have 500 shares and sell half, you would be reducing your position. To sell all the shares you own is to square your position. When you’re square (also called flat), you have no position in the security. All your money is in cash. You’re neutral. After traders have been accumulating the security on rising prices, eventually the price goes too far.Too far is a relative term and can be defined in any number of equally valid ways, but basically it means any price extreme that’s wildly abnormal, statistically speaking. When a price has reached or surpassed a normal limit, it’s at an extreme....
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