Behavioural Finance Essay Example | Topics and Well Written Essays - 750 words

Behavioural Finance - Essay Example It is very clear that some of the participants in the market do not make rational decisions which translate to mistakes. However, astute market players get the chance to capitalize on such mistakes. For instance, a rational investor can take the decision to buy when there is market crash resulting from speculative behavior (Mussweiller & Schneller, 2003, p. 124). Given a risk-adjusted basis, rational investors can beat market performance in a consistent manner. According to the perfect market hypothesis, prices reflect the full information about the market. This has the implication that an investor cannot beat the market unless he or she has inside information. A number of indices have been created with the aim of mimicking market performance. Research studies indicate that index funds account for almost 10 percent of the U.S. stock market capitalization and 60 percent of the money flowing into mutual funds. Despite the increasing euphoria towards passive management, there is active management which has enabled investors beat market bearing returns. Behavioral finance insists that investors are irrational in their decisions and that it is easy to partly predict future performance of stocks using their past performance. Careful analysis of the past trends of the tocks has the advantage of making it possible to outperform the market (Mulino, Scheelings, Brooks & Faff, 2009, p. 50). Rational investors can outperform because there exists inefficiencies in the capital market which create investment opportunities. Rational investors outperform the market because irrational investors often find themselves in the bottom part of the distribution pattern. There is some level of disconnection between stock performance and stock market valuation. The existence of irrational investors has resulted in the markets being driven by emotions rather than logic (Dreman, Johnson, MacGregor & Slovic, 2001, p. 127). However, research studies indicate that logic often triumphs over em otions. Irrational investors tend to lose while logic investors record gains. Most of the investors in the market do not bother to look at the fine details of their investment portfolios. Instead they look for information such as who are investing in the same portfolio and this has the negative effect of encouraging wrong decisions. There are a number of situations that a rational investor can exploit and record superior performance that the market. Theoretically, this is possible even though no investor has ever recorded consistent returns above market expectations (Statman, Fisher & Anginer, 2008). First, a rational investor can do a comprehensive homework and identify small cap stocks that in most cases are not well followed. Such stocks are often ignored by equity funds because of the fear of high risks associated with small companies. Furthermore, such companies are not well known in Wall Street and this makes it possible for most of the investors to ignore them (Caginalp, 2002 , p. 73). A rational investor can identify such companies and analyze their prospects for superior returns. The small cap firms have a potential of recording higher returns than the market because their true value has not been influenced by speculations. Second, the market sometimes overdoes its pessimism for a number of individual companies as well as certain sectors (Bruce, 2003, p. 125). The situation

Decartes' Argument Essay Example | Topics and Well Written Essays - 500 words

Decartes' Argument - Essay Example We look at and feel the objects around us with our senses- thus our senses are the gateway to understand the phenomena of the world. However, our senses and perceptions are defined in different ways. Sometimes we do not feel the same way about certain things at different times. As we grow from our infancy to adulthood and beyond, our perceptions change with time, our experiences, and learning. Therefore, we cannot depend upon our senses to comprehend or understand the nature of objects or the world itself. Our senses give us a limited knowledge about other objects or ourselves. For instance, we can sense or feel physical or emotional pain through our senses; yet we cannot ascertain the duration of pain from our previous experiences. This is an everyday example that manifests the limitation of trusting our senses. Descartes argued that passion led by reason can be trusted to a greater extent. This is because with each new experience, we learn something new about the way we perceive the world with our senses. If our reasoning faculty is in charge of our senses, we can broaden the areas where we can trust our senses. The claim is that if, in any particular case, the teachings of nature were untrustworthy, then the veracious God would have given us the means to correct it... we can ... trust the teachings of nature and believe that our sensations proceed from bodies, in spite of the fact that our inclinations are not always trustworthy. But, when another faculty, reason, of course, gives us the means to correct the teachings of nature, then they must be rejected... In the end, Descartes uses sensation to establish the existence of bodies, he is very careful to claim that sensation, by itself, does not establish the nature of bodies. (Rorty, 106) This is where other philosophers object to Descartes argument. He believes that senses do not belong to the material world as they keep changing with the change in objects; or sometimes convey incorrect perception of