Behavioural Finance and their Implications for Financial Products

Question: Discuss about the Insights on Behavioural Finance and their Implications for Financial Products. Answer: It can be hereby mentioned that higher awareness nurturing insights of particularly behaviouralfinance essentially throws light on different subjective experience of risk. However,finance industry has made considerable investments for educating financiers and investors. The existing language of risk as well as tolerance of risk is necessarily evolving to replicate better understanding of sensibility of financial decision making (Bodie 2013). Nevertheless, the language need to progress faster and financial corporations need to extend their reactions to behaviouralfinance beyond the point of educating different investors and into innovation of products. Framing effects indicates towards the fact that particularly the choices can specifically be worded in a manner that highlights both the positive or else negative factors of identical decisions leading to alterations in the relative attractiveness (Hirshleifer 2015). Again, mental accounting refers towards the tendency of individuals to separate their finances into different separate accounts grounded on different subjective standards. Apart from this, familiarity bias essentially has a strong influence on the overall buying pattern of individuals and refers to the propensity to tag investments. Essentially, the familiarity bias takes place at the time when financiers have the preference towards familiar or else popular investments despite apparently obvious gains from the process of diversification. Again, in this connection, it can be said that the representativeness heuristic is also an essentially behavioural aspect that affects investment decisions. In particular, heuristics can be regarded to be simple rules that can be used at the time of arriving at judgements. However, representativeness is essentially the extent to which a specific event is representative of parent population (Samek 2014). Particularly, representativeness heuristics is a behaviour that can lead to wrong conclusions infinance by over approximation of the capability of the heuristics to accurately predict the probability of different events. In addition to this, anchoring is another way of using irrelevant information as particularly a reference for the purpose of analysis or else estimation of certain unknown value or else information. In particular, anchoring bias is specifically a behavioural bias in which there is utilization of psychological benchmark, heuristics or else rule of thumb (Garcia 2013). Furthermore, anchoring also carries excessively heavy weight on the decision making process of market participants. In behavioural finance, the irrationality of financiers can be consid ered to a factor on which individuals tend to concentrate at the time when they make decision of investment and there also lies implications for particularly corporate finance. In behavioural finance, overconfidence can be regarded as overestimation or else exaggeration of the capability of an individual to carry out a particular task. There essentially exists a very fine difference between overconfidence and confidence. As rightly indicated by De Bondt et al. (2015) Confidence refers towards realistic trusting in capabilities of an individual, whilst overconfidence generally suggests an excessively optimistic evaluation of knowledge of an individual or else control over a particular situation.Particularly, overconfidence leads to illusion of control and leads to excessive optimism. Apart from this, there are also different emotional factors that acts as a behavioural bias in finance. In particular, psychologically investors want to gain a dollar as much as they want to avert a loss of a dollar. From the financial perspective, loss aversion can direct towards sub optimal decisions. Again, modern theory of portfolio enumerate acceptance of risk as the supplementary marginal reward that a particular investor require to accept additional amount of risk. It can also be seen that investors essentially prefer to take up known risks rather than unknown risks even at the time when choice leads to lesser expected pay off (Baker and Filbeck 2013). However, typical financiers desire and deserve higher amount of security, transparency and at the same time predictability than most of the financial products can deliver. Therefore, this indicates the need for higher investment in the product innovations that in turn can mitigate behavioural aversions while maintaining broad as well as balanced exposure to different markets. Particularly, investors might consider investments on m anaged funds that are essentially investment fund that are run on behalf of financier by particularly an agent. In addition to this, finance industry might consider delivering credit cards that are essentially small cards in plastic that can be issued by banks and permit the holder to buy goods or else services on different credit. In addition to this, the banking institutes can also deliver bank account that is essentially an arrangement is made within a bank in which one individual might deposit and at the same time withdraw money and in certain cases pay interests (Phung 2014). Furthermore, banks and financial service institutions might provide savings vehicles that are particularly accounts that are designed to let aside money that is also separate from checking account. Among all the different financial products, the financial product of managed funds can be recommended. The deliverance of managed funds can offer plenty of things to all the investors. Majority of financiers don t have sufficient money to purchase tens or else hundreds of diverse types of investments to attain diversity (Liao 2014). However, by way of pooling finances with other financiers, a purchaser of mutual fund gains advantage from the vast pool of funds by gaining access to vast pool of finances by accessing a wide array of securities. Again, managed funds is also easy for beginners to get involved as people dont need to be sophisticated financiers to purchase managed funds. In addition to this, mutual funds can also be used as a managed fund that are necessarily all in one package (Liao 2014). In place of buying different individual exchange traded funds (ETFs), varied stocks as well as bonds, a particular mutual fund can hold them all in one package. One of the main advantages of the managed funds is that for a minimum investment even a novice can admittance to a professional money manager. In addition to this, very low minimum investment is also necessary for managed funds and thi s also permits systematic investment planning in which individuals can contribute small amounts on a consistent manner (Garcia 2013). Again, the financial service of portfolio management can be taken into account as this can help in decisions regarding investment mix as well as policy, aligning investments to different objectives, allocation of assets for different individuals as well as institutions along with balancing risk against performance. References Bodie, Z., 2013. Investments. McGraw-Hill. Hirshleifer, D., 2015. Behavioral finance. Annual Review of Financial Economics, 7, pp.133-159. Garcia, M.J.R., 2013. Financial education and behavioral finance: new insights into the role of information in financial decisions. Journal of Economic Surveys, 27(2), pp.297-315. De Bondt, W.F., Muradoglu, Y.G., Shefrin, H. and Staikouras, S.K., 2015. Behavioral finance: Quo vadis?. Samek, A.S., 2014. RAND Behavioral Finance Webinar. Baker, H.K. and Filbeck, G., 2013. Paradigm Shifts in Finance Some Lessons from the Financial Crisis. Phung, A., 2014. Behavioral Finance: Key ConceptsMental Accounting. Investopedia. com, available at www. investopedia. com/university/behavioral_finance/behavioral5. asp. Liao, C., 2014. Essays in Behavioral Finance (Doctoral dissertation, University of Toronto).