Behavioural Finance Theory 2022

Running head : BEHAVIOURAL FINANCE
BEHAVIOURAL FINANCE
Name of the Student
Name of the University
Author Note

BEHAVIOURAL FINANCE
Table of Contents
Executive Summary...................................................................................................................2
White paper on Prospect Theory................................................................................................3
Bias Identification....................................................................................................................10
Behavioral Finance and Investments.......................................................................................11
Behavioural Corporate Finance................................................................................................13
Future and Behavioural Finance Post 2008.............................................................................14
References................................................................................................................................16

BEHAVIOURAL FINANCE
Executive Summary
The aim of the study is to deliver six parts for the new employer, Shefrain Consulting
for the purpose of demonstration of the competence in the area of the Behavioural Finance.
The report further aims towards a matured knowledge regarding the Prospect theory and the
areas where it implies, on the traditional theory of making of decisions. Apart from that, the
report gives knowledge on the various behaviour biases, and where can they be implemented.
It provides a brief demonstration on the theory of behaviour finance with respect to an
investment decision of a particular client as well as the allocation of its portfolio. The various
essential financial decisions, which may be impacted by the behavioural factors, are also
taken into consideration. It articulates the essential aspects of behaviour finance that may
have an impact on my career plus prospects for Shefrain Consulting.

BEHAVIOURAL FINANCE
White paper on Prospect Theory
1. Prospect theory vs. expected utility theory
Prospect Theory
(Barberis, Nicholas, Abhiroop Mukherjee, and Baolian Wang 2016)Prospect Theory
goes on an assumption that losses and the gains are estimated on the distinctly and
therefore the making of an individual’s decisions, which are on the basis of perceived
profits in place of the perceived losses(Deshmukh, G. K., and Sanskrity Joseph 2016).
The Prospect Theory is also called as the Loss Aversion theory( Ramiah, V., Zhao, Y.,
Moosa, I., & Graham, M. 2016). The general conception behind the Prospect theory is
that of two alternatives are taken together in front of a particular individual, both having
equality in the presentation in terms of the possible profits and the rest in terms of
potential losses, the first alternative being taken into consideration (Joo, Bashir Ahmad,
and Kokab Durri.2015).
The working of the Prospect theory
According to Baker, H. Kent, Greg Filbeck, and Victor Ricciardi (2017) The
Prospect theory can be defined as the theory which is a part of subgroup of Behavioural
Economics, which describes how the individuals can make a choice between the
probabilistic Alternative, which involves risks, and the possibility of distinct outputs id
not known to the individual. The underlying explanation for the behaviour of an
individual under the Behavioural Finance theory or the Prospect theory can be that due to
the choices that are independent and singular, the possibility of the profit or losses is
reasonably taken into the assumption as being the half possibility that is actually
presented. Significantly, the possibility of the profit is generally taken into perception as
much greater (Hsu, Dan K., Johan Wiklund, and Richard D. Cotton 2017). A proposal