Difference Between Behavioral Finance And Traditional Finance | MBA Finance in Bangalore

Posted by Prof. Dr. Samiya Mubeen On 10/10/2022 07:11:30

Behavioral finance manifests research that traditional assumption of anticipating utility maximization with rational shareholders inefficient market. An efficient market hypothesis has dominated finance for 30 years. Three basic theoretical arguments form the basis of the EMH. The most significant is that shareholders are rational and by connection, securities are valued rationally. MBA finance in Bangalore

Traditional finance is finance that is carried out for a very long period of time following the usual or traditional method of financing which includes getting a loan or a line of credit through financial institutions, specifically, banking institutions. For example, a person getting a loan from a bank is considered traditional finance. In traditional finance, the decisions taken by investors are rational and it operates under the condition of uncertainty and risk. It is concerned with numerous concepts, theories, and principles. MBA in business analytics in Bangalore

Traditional finance is said to be normative as it follows the rules and expectations which are followed universally. It is not influenced by any personal feeling or opinion and is solely based on facts hence traditional finance is said to be objective. Behavioral finance word behavior itself suggests that behavioral finance is about a person’s way of acting or the psychology of the person behind a concept. In short, behavioral finance is the study of the psychology of investors while investing or making investment decisions.

Behavioral finance, a sub-field of behavioral economics, proposes that psychological influences and biases affect the financial behaviors of investors and financial practitioners. Moreover, influences and biases can be the source for the explanation of all types of market anomalies and specifically market anomalies in the stock market, such as severe rises or falls in stock price. For example, an investor analyses any share, the profit and loss of the company, and the environment of the firm, thousands of times before investing in it.

This thinking procedure of the investor is assumed as behavioral finance. Therefore, in behavioral finance, the investor's decisions are based on emotional biases which include overconfidence, regret, fear of loss, self-control, etc. It is also said to be subjective as the decisions are affected by any personal feeling or opinion and are based on only one perspective. Unlike in traditional finance, the decisions taken in behavioral finance are descriptive. top MBA colleges in Bangalore

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