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M21087 Behavioral Finance And The Psychology Of Investment Assignment Answer UK

M21087 Behavioral Finance And The Psychology Of Investment Assignment Answer UK

M21087 Behavioral Finance and the Psychology of Investment course explores the fascinating intersection between finance and psychology. In traditional finance, it is assumed that all investors are rational and make decisions based on perfect information, but this is not always the case. Behavioral finance acknowledges that investors are human beings and can be influenced by emotions, biases, and other psychological factors.

In this course, you will learn about the key concepts of behavioral finance, including prospect theory, overconfidence, loss aversion, and herding behavior. You will also examine how these concepts apply to real-world investment decisions, including stock picking, portfolio management, and asset allocation.

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In this section, we will describe some assignment tasks. These are:

Assignment Task 1: Articulate core concepts and principles of behavioural finance at final year undergraduate level.

Behavioral finance is an interdisciplinary field of study that combines concepts from psychology, economics, and finance to explain how people make financial decisions and how those decisions affect markets. The core concepts and principles of behavioral finance at a final year undergraduate level can be summarized as follows:

  1. Prospect Theory: Prospect theory is a behavioral economic theory that describes how people make decisions under risk and uncertainty. It suggests that people are more sensitive to potential losses than potential gains of the same magnitude, and that they evaluate outcomes in a non-linear way.
  2. Herding behavior: Herding behavior is the tendency of individuals to follow the actions of a larger group, rather than making their own independent decisions. In finance, herding can cause prices to move in a particular direction, leading to market bubbles or crashes.
  3. Anchoring and Adjustment: Anchoring and adjustment is a cognitive bias in which individuals rely too heavily on an initial piece of information (the anchor) when making subsequent decisions. This can lead to inaccurate or biased judgments.
  4. Overconfidence Bias: Overconfidence bias is the tendency of individuals to overestimate their own abilities or knowledge. This can lead to taking on excessive risk or making poor investment decisions.
  5. Loss Aversion: Loss aversion is the tendency of individuals to strongly prefer avoiding losses to acquiring gains. This can lead to holding onto losing investments for too long or selling winning investments too soon.
  6. Confirmation Bias: Confirmation bias is the tendency of individuals to seek out information that confirms their existing beliefs, while ignoring or dismissing information that contradicts those beliefs. This can lead to making investment decisions based on incomplete or biased information.
  7. Mental Accounting: Mental accounting is the tendency of individuals to treat different sources of money differently, based on factors such as their origin, purpose, or destination. This can lead to irrational financial decisions.
  8. Framing: Framing is the way in which information is presented or framed can affect decision-making. The same information can be presented in different ways, leading to different decisions.
  9. Regret Avoidance: Regret avoidance is the tendency of individuals to make decisions in order to avoid feeling regret, rather than based on rational analysis of the situation. This can lead to suboptimal financial decisions.

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Assignment Task 2: Critically discuss and evaluate the relevant empirical research literature.

The term ‘relevant empirical research literature’ can be defined as scientific papers that are significant to a particular topic under investigation. It is important to critically evaluate such literature in order to determine its value and contribution to the overall understanding of the topic.

There are a number of factors that need to be considered when critically evaluating research literature. These include the quality of the research design, the methodological approach used, the data analysis and interpretation, and the conclusions drawn. It is also important to consider whether the research is relevant to the specific topic under investigation.

When critically evaluating research literature, it is important to consider all of these factors in order to make an informed judgment about the value and contribution of the research.

Assignment Task 3: Obtain an understanding of the relationship between short-term trading, market microstructure theory and behavioural finance.

Short-term trading refers to buying and selling financial assets, such as stocks or currencies, over a short period of time, typically a few minutes, hours, or days. Market microstructure theory is concerned with the process by which assets are traded, including the mechanics of the trading process, the behavior of market participants, and the impact of market rules and regulations on trading behavior. Behavioral finance, on the other hand, is the study of how psychological biases and emotions affect the behavior of market participants and the pricing of financial assets.

Short-term trading is closely related to both market microstructure theory and behavioral finance. Market microstructure theory can help traders understand the mechanics of the market, including how prices are determined, the role of market makers, and the impact of different types of orders on the market. By understanding these factors, traders can develop strategies to exploit inefficiencies in the market and earn profits from short-term trades.

Behavioral finance can also be relevant to short-term trading because it helps explain why market participants sometimes make irrational decisions that can lead to market inefficiencies. For example, traders may be subject to overconfidence, confirmation bias, or other cognitive biases that cause them to overestimate their abilities or ignore information that contradicts their beliefs. These biases can lead to market inefficiencies, such as mispricings or temporary imbalances in supply and demand, that traders can exploit for profit.

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