Behavioural Finance

JBIMS | TYMFM | BATCH 1 | GROUP 1

Swagatika Behera 16-F-206

Khushali Brahmbhatt 16-F-211
Princiya Crasta 16-F-218
Anand Dubey 16-F-225
Ankita Desai 16-F-222
Sanmit Amin 16-F-201
Sumant Behera 16-F-205
Anzenia Dias 16-F-202
Jay Mandavkar 16-F-252
Jitendra Bavkar 16-F-203
 If you cannot control your emotions,
you cannot control your money.
-Warren Buffet

Substance of Emotion
• Emotions may be negative or positive.
• Negative emotions are anger, fear, stress, guilt etc; whereas positive emotions
are happiness, gratitude, hope, enthusiasm and so on
• Positive psychology promises to improve the quality of life.
 Features of Emotion
• Cognitive Antecedents: Emotional Response is triggered by a
belief
• Intentional Objectives: Emotion related to something like a person
or situation
• Physiological system: Emotions are accompanied by changes in
the hormonal and nervous system
• Physiological expression: Emotions are often characterised by Jon Elster
observable expressions associated with how a person functions
• Ph.D., University of Paris
• Valence: This term is used to rate feelings of pain and pleasure •
(1972)
Social and political
theorist
• Action tendencies: Emotions tend to produce action • Author of Alchemies of the
mind, Making sense of
Marx etc
 Theories of Emotion
Physiological Theories
• James-Lange theory – Proposed by William James and Carl Lange (External Stimulus
leads to Physiological responses which, in turn leads to an emotional reaction)
• Cannon-Bard theory- We feel emotions and physiological reactions, simultaneously
• Facial feedback theory- Facial expressions are not only the results of our emotions but are
also capable of influencing our emotions

Cognitive Theories
• Thoughts and other mental activities have an important bearing on the formation of
emotions. Two factor cognitive theory of emotion
• Emotion is a disturbance that occurs in the following order – Cognitive appraisal,
Physiological changes and Action
Evolutionary Perspective on Emotions
• What is Emotion
• How did emotion evolve
• What is Adaptive emotion
• Universal emotions
 Anger
 Fear
 Disgust
 Happiness
 Sadness
 Surprise
 Contempt
Many theories on emotions evolutions
• Darwin's Principles
 Principle of Serviceable habits
 Antithesis
 Excitement

• Paul Ellam
• Robert Zajonc
Types And Dimensions of Emotions
• Plutchik’s Wheel of Emotions
Breaking Down Plutchik's Wheel of Emotions.
Primary the eight sectors are designed to indicate
that there are eight primary emotion dimensions.
They are anger, anticipation, joy, trust, fear,
surprise, sadness and disgust. Each emotions has a
polar opposite as below
• Two Dimension of Emotions
With this in mind, we can list the
basic emotion factors and dimensions as: Valence-
from Joy (pleasant) to Sadness (unpleasant)
Arousal-from Attentiveness/ Love (passive)
toAnger/Hostility (active) Dominance-from Interest/
Self-Assurance (in control) to Fear-Anxiety (lack of
control)
Emotional Style
Six Dimensions of Emotional Styles by –Richard J Davidson
• Resilience Style
• Outlook Style
• Social Intuition Style
• Self Awareness Style
• Sensitivity to Context Style &
• Attention Style.
Emotions and Investing
• Emotional Time line-By Lola Lopez

Hope Anticipation Pride

Decision ------------------------------------------------- Goals
Fear Anxiety Regret

• The Five Year Rule of Investing.

Emotional Intelligence – by Daniel Goleman
• Self Awareness
• Self Regulation
• Internal motivation
• Empathy
• Social Skills
Fairness, Reciprocity, and Trust

To understand fairness, reciprocity, and trust, psychologists have designed various

games or experiments. The important ones are:
• Ultimatum games:
• Dictator game :
• Trust game
Ultimatum games:
• The ultimatum game provides us with an insight in to
how two individuals act when deciding how to divide a
sum of money given to them.
• The experiment provides two players with a sum of
money. Player one proposes a division of the money
between the two players.
• Player two can then either accept or reject player one’s
proposal. If he/she chooses to reject, neither player
receives any money. If he/she chooses to accept the
proposal, the money is split accordingly.
Dictator game:
• In the dictator game, player one (often referred to as
‘the proposer’) is given the option to split an
endowment of cash.
• Player two (often referred to as ‘the responder’) plays
an entirely passive role and simply receives the
remainder of the endowment left by the proposer.
Player two has no strategic role in the game
 Trust Game:

• There are two people in two separate

rooms – room A and room B. Person in
room A is endowed with $ 10 and we will
call him/her as trustor (sender).
• At first stage of experiment trustor
decides which amount of money, if any,
should be sent to the person in room B.
• Experimenter inform each individual
that if person in room A decided to
share some money with another person,
the amount of cash got by individual in
room B would be tripled.
• On the second stage, individual in room
B, which may be named
as trustee (receiver), now should decide
which share , again if any, of this
received tripled cash should be returned
back to the trustor.
Conformity
Conformity reflects a behavior that is a response to a perceived group pressure.
Asch’s Conformity Experiments
Question : Which of the Lines
on the second card (A, B/ or C)
is the same length as the line
on the first card?

“That we have found the

tendency to conformity in our
society so strong that
reasonably intelligent and well
managed young people are
willing to call White Black is a
matter of concern. It raises
question about out ways of
education and about the values
that guide out conduct “
Social Influence

In a book titled Social Influence, renowned sociologist Robert Cialdini

has discussed a variety of social and other factors that influence the
behaviour of people.
Factors
• Reciprocation
• Social Proof
• Liking
• Obedience to authority
• Scarcity
Social Influence On Investment & Consumption
Herd Instincts & Overreaction
• Natural desire of humans to be a part of a group or “herd”. It induces one to decide on
the feel of the herd than independent analysis.
• In Financial markets investors overact to good news and bad news, leading to stock
market bubble / crash.
• The herd mentality means that financial assets are unlike other goods. The demand
for them tend to increase when prices rise.
Conspicuous Consumption
• Irrationality induced by desire to impress others. Conspicuous consumption tends to
be a zero sum game.
• Inconspicuous consumption refers to goods and activities that are inherently valuable
that are not bought to show off or to achieve status.