University Behavioral Finance and Wealth Management Research Report

This report delves into the realm of behavioral finance, contrasting it with traditional finance perspectives on financial decision-making. It examines various barriers to sound financial judgments, including cognitive and emotional biases, consumer psychology, and market asymmetries. The report provides an analysis of biases that can influence individual financial decision-making processes, offering insights into the underlying reasons for these biases and suggesting strategies to mitigate their negative impacts. The content covers traditional finance and behavioral finance differences, barriers to good financial decision-making, analysis of biases, reasons behind the bias, and steps to mitigate the biases.

Running head: Behavioral Finance
Behavioral Finance
Name of the Student
Name of the University
Author’s note

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Executive Summary
The report is focused on the analysis of different biases of decision-making factors. It emphasis
on Both market and investors are rational in traditional finance decision-making system. It
undergoes with proper reasoning in decision-making theory. It focuses on proper balance in
association to cognitive thinking. Investors purely care about utilitarian characteristics. They
crosscheck the data effectively before investing in different segments. Characteristics help them
to analyze the current scenario of the market, which later gives them proper returns. Investors in
the scenario have perfect self-control to make investments in the market to the segment of the
control of the system. Barriers of the biases and reason behind it are described effectively. Proper
decision-making barriers are stated clearly and the features stated.
It can be concluded from the above topic that it is effective to clear out the barriers and
biases from decision-making point of view.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
a. Traditional Finance and Behavioral Finance differences........................................................3
b. Barriers to good decision financial decision making:..............................................................4
c. Analysis of biases, which influences own decision making....................................................9
d. Reason behind the bias............................................................................................................9
e) Steps to mitigate negative impact of the biases....................................................................10
Conclusion.....................................................................................................................................11
Reference list.................................................................................................................................12

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Introduction
This report focuses on traditional and behavioral finance performances. Overview of the
performances of the two aspects of the company is analyzed upon it. Behavioral finance is the
process by which finance performances are analyzed as well as investor’s analysis. It defines the
market functional of the economy. Limitation of self-control is defined effectively. Cognitive
and emotional analysis are made efficiently. Biases on financial decision making is defined.
Discussion
Behavioral finance is the study of psychological influence, which focuses on the
attributes of financial investor’s behavior and investor analysis. It involves subsequent effects on
the market. It helps to analysis that investors are not rational in every case and they have some
limitation on their self-control. On the other hand, this is the reason investors possess their own
biases.
a. Traditional Finance and Behavioral Finance differences
Traditional finance theory on perspective to financial decision-making behavior:
Both market and investors are rational in traditional finance decision-making system. It
undergoes with proper reasoning in decision-making theory. It focuses on proper balance in
association to cognitive thinking. Investors purely care about utilitarian characteristics. They
crosscheck the data effectively before investing in different segments. Characteristics help them
to analyze the current scenario of the market, which later gives them proper returns. Investors in

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the scenario have perfect self-control to make investments in the market. They evaluate the
intrinsic value and the percentage of return from the market. They analyze the amount of
volatility, which gives them a clear picture about the market. Investors are not confused by
unclear information and cognitive information from the market. If information is not factual and
might not match the requirements available for the investors then also the scenario doesn’t
confuse them. The investors have different plans to inherit data by which they finish off their
task and incur profits from the market.
Behavioral Finance in respective to financial decision-making process:
Investors are treated as normal indices but not rational indices. They do not consider
rational decision-making theory as because they seek understanding of business as personal
biases. There are some common biases of investors in behavioral finance. Overconfidence and
illusion of control, it is associated with excessive over confidence of the investors and not
earning the amount of profit they estimated earlier. Self-attribution biases, if they earn profit then
they give credit to their skills but if they loses then they have a habit to blame their luck. They
consider sheer luck for bad outcomes. Investors in this category have limited self-control. They
do not have the ability to think out of the box. Investors are influenced by their personal biases.
They do not follow the constructive rule in the process. Investors fall in the trap of cognitive
errors and the result is that they incur losses.
b. Barriers to good decision financial decision making:
Cognitive bias
Decision-making is type of activity which is inherently a cognitive activity, it will be
either rational or irrational. Rational decision-making is a process, which based on correct data

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and proper information upon which people can rely on. Whereas, irrational is a type where it is
based on assumptions which cannot be supported by evidence. Decision-making based on the
reference of individual reference, which includes reference and personality, which enables a
person to make efficient decision. Cognitive biases are classified under different segments,
confirmation bias, anchoring, halo effect, overconfidence bias, Confidence bias happens when
decision makers search for evidence, when they get to know about previous beliefs, it impacts
the outcome of different conclusions derived from their side. Anchoring is a type of bias, which
occurs when the decision makers have overreliance on the initial part of information. This effects
the overall decision making of the process in the subsequent judgments Asx.com.au.(2019).
When the decision maker firstly receives information, they fall for the judgment on the
full topic of the course based on the initial information. This effects the quality of the judgment
as the overall judgment cannot be the same as different sort of information is possible to come on
the way. Halo effect is the scenario, which occurs due to the decision maker’s obsession, is about
the impression of particular person, company, brand or any other product. The observer gets
intimate to the impression of the branded images and slightly ignores normal goods or person. It
results negative sometimes, when the high impression candidates fail to perform then the normal
person gears up to perform well and the managers fail to make a perfect decision in these cases.
Lastly, overconfidence bias is the process, which occurs due to overestimation of its
judgment by the decision maker itself. It is the scenario, when the person feels high on his
ability, skills, level of governance and change of success. When the decision maker is very much
obsessed about his own talent, he tends to ignore other’s success and views. This leads to
destruction of the structure.

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Emotional biases
It occurs due to personal feelings of a person when the decision maker makes decision. It
is influenced by the personal experiences of the policy maker. It is a type of bias, which
influences the investor. Emotional biases do not always incur errors and in some case, it helps to
intake more protective and suitable decision making in the organization. There are some
instances of emotional bias, which effects financial decision-making. Loss aversion bias, when
an investor have a stock in portfolio which is much down that it will give negative returns to the
investor. However, if the stock would have been sold out then the money left after swelling the
stock could have reinvested in the market into a higher quality stock. This psychology of the
investor in decision-making field is a threat to an organization. According to seminal academic
papers, Endowment bias is a type, which is similar to loss aversion theory (Schleich, 2019). It is
an idea where it is measured, what the investors own is valuable but what they do not own is
lesser valuable in nature. When the other sectors proving to be the best performing gadgets but
still the investor do not prefer to shift to other stocks because he feels his stocks are best, ahead
of the other segments.
Consumer psychology barriers
When financial mangers do not understand requirement of the consumers and the needs
of consumers, then it becomes very hectic for the managers to facilitate the consumer needs
(Rabbitt, 2019). Customers are more into installment payment rather than one time investment,

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the financial manager must involve more installment payment in loans and advances procedure.
It will enable to attract more number of customers for the organization.
Lack of unclear decision-making
There is certain ambiguity in accordance to the level of power manager holds. It refers
that certain modifications are needed to change in the organization (Rahmani et al. 2018). Online
payment systems needed to involve in the process, which involves lesser confusion to the
managers and clients (Song, & Ahn, 2019).
Lack of time
Managers get less time to identify better financial plans for the company. To compose
future financial estimations, it is required to poses maximum time available to prepare it.
Business is subjected to incur emergencies and decision-making is a part of it. Every manager is
part of this challenge.
Lack of reliable data
Lack of data is the worst condition ever happen to the employees. It is considered as a
major hindrance for making best decisions. Incomplete data makes it difficult for the managers
to make appropriate decisions. Incomplete data will force the managers to take up decision,
which is not suitable for the company (Tindale & Winget, 2019).
Risk taking ability

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Finance managers must have a good risk taking ability, in order to maintain good profit.
Calculative risk taken by the managers for effective decisions in the organization, mostly
managers lose out in this scenario by taking wrong decisions (Li et al. 2018). Casual attitude and
ignoring the risk associated in the company leads to incur risk in the company. Hence, ignoring
risk of the organization leads to inappropriate decisions of the company.
Inadequate support
If the subordinates of the company do not help the manager in order to take up charge to
finish off the task allocated to then it will be a huge problem (Samulowitz et al. 2018). Tasks are
allocated between different employees according to their expertise. This creates a balance
teamwork collectivity, which increases productivity of the organization.
Lack of resources
Lack of resources disables the productivity of the team. Managers find it difficult to
implement its decision (Dohmen et al. 2018). When finance managers do not get appropriate
instruments to satisfy the financial requirements of the company, it becomes difficult for the
company to manage its obligations.
Inability to change
Organizations have a unique culture, which is practiced in its organization. The policies
and rules are different in every organization and thus the working chemistry is also unmatched
with one another. Some policies are not rational to the managers; it becomes hectic to the

9Behavioral Finance
manager to co-up with the policies (Guner, Parkhomenko & Ventura, 2018). Decision-making
capacity is always a new boost to managers who thrives for changes.
Emotional bias
Making current decisions in accordance to the current emotional state of the manager, if
the finance manager decides to undergo with a project with 10% cost of capital instead of 12%
capital, it will be a loss to him (Hietanen et al. 2018). Then also, the finance manager will
undergo with it.
c. Analysis of biases, which influences own decision making
There are different sort of biases which influences own decision-making system.
Confirmation bias; favors information, beliefs and preconceptions (Weinberg, & Gould, 2018).
Often leads to negativity in structuring. Authority bias figures opinions from higher authorities
and with innovative terms. Managers find it egoistic when the ideas of superiors are imposed on
his term. False casualty bias happens when the project fails due to miscalculations of the
managers and the payback period of the project increases (Coviello et al. 2018). The managers at
this point of time ask for evidence, who did the work and where it was done and by whom it was
done. Action bias is the process where something done without prior analysis. Team members at
this time understand that they need to perform activities, without proper analysis this activities
are difficult to perform. Self-serving bias is the process, which occurs while the manager is
focused on self-esteem psychology.

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d. Reason behind the bias
According to (Beshears et al. 2018), confirmation bias occurs due to believing of
favoring information, which confirms beliefs and preconceptions much earlier than making
decision makers. Managers tend to look for the particular beliefs, which he favors to imply in
organization. There are several instances, which focuses on the association of information.
Conformity bias occurs due to choices of thinking of mass population influences. Even, if it is an
independent personal judgment then also the managers focuses on his choices (Roll, 2019). At
the end, this sort of decision making leads to poor decision making which is detrimental to
creativity analysis. Authority bias occurs due to implementing authority opinions within the
innovative teams. When the senior members impose opinions on the managers, it becomes
egoistic in nature for the managers (Banerjee et al. 2018). Framing bias is the process, which
occurs due to blaming by the managers to other employees. Errors which done by the managers
are blamed to other employees to be on the safe side. Managers tries to develop protocol by
maintain a gap between the superiors and normal employees etc. (Ghajargar, Wiberg &
Stolterman, 2018).
Ambiguity bias occurs due to financial managers do not prefer to understand new things, when
the outcome of the process is more knowable in nature, managers do not try to implicate new
ideas in financial decision system (Angeletos, Collard & Dellas, 2018). According to my
experience, strategic misrepresentation is one of the key biases performed by the company.
Managers knowingly understand the costs and the benefits of the products misrepresent the
important data completely wrong. The analysis performed by the managers is prone to
understand the cost and benefits of the products associated. Pro innovation bias is the process
which can come out due to lack of innovation of the company, managers lack proper

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implementation of the plan; which is prepared by them during the operating process of the
financial project (Roige & Carruthers, 2019).
e) Steps to mitigate negative impact of the biases
Focusing on the process has two approaches to decision-making:
Reflexive- It is automatic, effortless and needs to go with their guts (Bushee, Gerakos & Lee,
2018). It is the default option.
Reflective- It is logical and methodological but it requires effort to engage.
Prepare, plan and pre-commit teaches to invest by preparing, planning and then pre-committing
accordingly.
Relying on the reflexive decision-making makes the managers more prone to deceptive biases,
emotional and social influences. However, implementing logical decision-making process
reduces these errors.
Conclusion
It can be conclude from the above discussions that traditional finance and behavioral finance
related perspective needed in accordance to the topics selected by the organization. Traditional
finance is related to more core discussions and deep analysis of financial benefits of the
organization. There are various barriers in accordance to take financial decision of the company.
Managers are needed to asses those problems within the company and applied with cognitive and
emotional basis, consumer psychology and other metrics. Managers recommended looking after
decision-making system by removing biases of the company.

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