Description
When we look at investing, either at the personal level or the choices made by a company, our focus is on the financial, quantitative aspect of these available choices and the ultimate decision to invest. However, choices made about an investment do not always follow rational, quantitative thought. As humans, there is a psychological aspect that goes into decision-making, and this includes financial decisions. Known as behavioral finance, these psychological factors impact the investment that may be made by an investor or a company leader, the types of risk that an investor may be willing to take, and even their reaction to market variables.
Conduct some research on behavioral finance and how it relates to investment decision-making and portfolio risk. Address the following:
Present a theory related to behavioral finance (examples are herd mentality, castles in the air theory, or behavioral biases). Include the title of the theory, the theorist/founder (if known) and a brief overview of what the theory states.
Explain how this theory applies to investment risks and return for a portfolio (for an individual) or an organization’s overall financials (for a business).
How does the behavioral side of finance relate to the quantitative data that we have reviewed this week? Is this a negative or positive relationship?
Berkrk, J., & DeMarzo, P. (2019). Corporate Finance (5th ed.). Pearson Education (US). (Mandatory) and other references
