Relevance Of Behavioral Finance In Malaysias Financial Scenario Finance Essay - Free Essay Example

Sample details Pages: 5 Words: 1629 Downloads: 5 Date added: 2017/06/26 Category Finance Essay Type Cause and effect essay Did you like this example? Investors think and act rationally when it comes to buying and selling stocks according to economic theorists. The economists have opined that the financial markets are stable and efficient due to the stock prices that seem to follow an expected pattern and the overall economy portrays trends toward general equilibrium. According to Shiller (1999), in real world, the investors do not investigate and act rationally. Don’t waste time! Our writers will create an original "Relevance Of Behavioral Finance In Malaysias Financial Scenario Finance Essay" essay for you Create order Investors speculate stocks between unrealistic highs and lows because of their attitude of greed and fear. This type of investors behavior is known as behavioral finance which explains on how emotions and cognitive errors influence investors and the decision making process. The behavioral finance is a study of the markets which related to a psychology aspect where it concerns more on the reason why people buy or sell the stocks and also in the event where they do not buy stocks at all. This study encompasses research that revised the traditional assumptions of expected utility maximization with rational investors in efficient market. The two pertinent points of behavioral finance are cognitive psychology and the limits to arbitrage (Ritter, 2003). Cognitive refers to a situation where how people think and the limit to arbitrage when market is inefficient. Behavioral finance uses models in the case of some agents in a situation of not fully cautious either because of preferences or because of mistaken beliefs i.e. the loss averse agent. Herbert Simon (1947, 1983) indicated that many of the basic theories of behavioral finance related to a series of new concept of bounded rationality. It is related to cognitive limitations on decision-making. As a result, human behavior is made on the basis of simplified procedures or heuristics (Tversky and Kahneman, 1974). A study has been done by Slovic (1972) on investment risk-taking behavior and he found that, man has limitations as a processor of information and shows some judgmental biases which lead people to overweight information. People also tend to be overreact to information (De Bondt and Thaler, 1985, 1987). Investors typically become distressed at the prospect of losses and are pleased by possible gains: even faced with sure gain, most investors are risk-averse but faced with sure loss, they become risk-takers. Thus, according to Khaneman, investors are loss aversion. This loss aversion means that people are willing to take more risks to avoid losses than to realize gains. Loss aversion describes the basic concept that, although the average investors carry an optimism bias toward their forecasts (this stock is sure to go up), they are less willing to lose money than they are to gain. THE BEHAVIOR OF INVESTORS There is a need for imperfect decision-making procedures, or heuristics (Simon, 1955, Tversky and Kahneman, 1974). Hirshleifer (2001) argues that many or most familiar psychological biases can be viewed as outgrowths of heuristic simplification, self-deception, and emotionbased judgments. This is due to reason that it has long been recognized that a source of judgment and decision biases, such as time, memory, and attention are limited, human information processing capacity is finite. According to Kent et al. (2001), investors tend to focus only in stocks that are on their radar screens. That is related to familiarity or mere exposure effects, e.g, a perception that what is familiar is more attractive and less risky. According to Kent et al., their findings were consistent with Blume and Friend, (1975) on the study of participation of U.S stock market, where they found that many investors entirely neglect major asset classes (such as commodities, stocks, bonds, real estate), and omit many individuals securities within each classes. Kent et al. (2001) also noted that the stocks that investors choose to sell subsequently outperform the stocks that investors retain. According to them, home sellers also appear to be loss-averse in the way that they set prices. They are reluctant to sell at a loss relative to past purchase price. This helps to explain the strong positive correlation of volume with price movement. This finding was consistent with the theory of Odean (1998) who showed that individual investors. THE PSYCHOLOGY OF INVESTORS Since a generation ago, stock market analysts have come to recognize that psychological factors can play a more crucial role in determining the direction of the share prices. However studies have found that psychological factors alone cannot send the share price to the moon and then push them down to the Precipice. Economic factors, as well as political factors also play a crucial role in determining the share price. Kahneman (1974) pointed out that people are prone to cognitive illusions, like becoming rich and famous or being able to get out of the market before a bubble breaks. People exaggerate the element of skill and deny the role of chance in their decision making process. People are often unaware of the risk they take. Add loss aversion to the mix and it is no wonder the average investor panics in a market downturn, a time perhaps to buy rather than sell. According to him, human beings are born optimists. Kent, Hirshleifer and Siew (2002), in their study found that re search on the psychology of investors was done by looking at the relationship between stock returns and variables on factors such as the weather (Hirshleifer and Shumway, 2001), biorhythms (Samstra, Kramer and Levi, 2001) and societal happiness (Boyle and Walter, 2001). These diverse investigations are motivated by emerging theories in psychological economics on visceral factors and the risk-as-feeling perspective. The risk-as-feeling perspective argued that these visceral factors could affect, and even override, rational cogitations on decisions involving risk and uncertainty. This creates predictable patterns in stock returns because people in good moods tend to be more optimistic in their estimates and judgments than people in bad moods (Wright an Bower, 1992, in Kent et al, 2002). In relation to stock pricing, the optimistic or pessimistic judgment about the future prospects from the business direction are widespread, stock prices should be predictably higher at times when mo st investors are in good moods than times they are in neutral or bad moods. . EVIDENCE FROM MALAYSIAN INVESTORS Based on the descriptive analysis of investment decision making behavior, it shows that economic factor is the most influential factor in determining their investment buying behavior followed by financial and frame of references. However, in terms of relying on emotions (i.e. gut-feeling, over-reaction), most respondents rate that they are unlikely in doing so. IMPLICATION Why does it matter if small individual investors do not behave as we think they should? There are two reasons according to De Bondt (1998). The first is that substantial financial management directly affects peoples well-being and the second reason is that investor behavior is likely to affect what happens in markets. With costly arbitrage, psychological factors become relevant and it would be unsound to model market behavior based on the assumption of common knowledge of rationality. As stated by Graham and Dodd, in De Bondt (1998), the (stock) market is not a weighing machine, on which the value of each issue is recorded by an extent and impersonal mechanism rather the market is a voting machine, where countless individuals register choices which are the product partly of reason and partly of emotion. RECOMMENDATION With these financial theories in mind, here are some investment tips and tools that can help the investors to avoid many investors common behavioral mistakes. Many people do not begin investing by setting goals and do not put enough emphasis on their specific time horizon. Many people buy stocks or fund because it did well in the past, rather than studying what it may do in the future. Investors often do not focus enough on diversifying their portfolios. According to Charles Heath, President of Roller Coaster Stocks, there are four rules before investing in stock market. (1) do not invest with the crowd, (2) get emotional out of the way, (3) be patient, and (4) take profit do not give them back. Researches have shown that many investors are overconfident. The majority of investors believe they can beat the market, despite historical evidence to the contrary. One reason that investors may feel overconfident is that the Internet provides quick access to information and leaves people feeling empowered to make decisions. However, information does not lead to good decision making, unless we know how to interpret it. Investor credulity and systematic mispricing in general suggest a possible role for regulation to protect ignorant investors, and to improve risk sharing. The potential benefits of government policy and regulations can help investors make better decisions, and can improve the efficiency of the market prices. CONCLUSION From prior research, it is found that there is persuasive evidence that investors make major systematic errors and there is evidence that psychological biases affect market prices substantially. Furthermore, there are some indications that as a result of mispricing, there is substantial misallocation of resources in the economy. Thus, there are some suggestions to the economists to study how regulatory and legal policies can limit the damage caused by imperfect rationality. Emotions and psychological biases in judgment and decision seem to have important effects on public discourse and the political process, leading to mass dilutions and excessive focus on transiently popular issues. If individuals were fully rational in their market and political judgments, therefore, government can intervene to remedy informational externalities in capital markets. The case against such intervention comes from the tendency for people in groups to fool themselves in political sphere, and for pr essure groups to exploit the imperfect rationality or political participants. However, it is a suggestion to help investors make better choices and make the market more efficient. These involve regulations, investment education, and perhaps some efforts to standardize mutual fund advertising. Limits on how securities are marketed and laws against market manipulation through rumor spreading can also protect foolish investors and restrict the freedom of action of those that may prey upon them.

The Theme Of Social Class And Order - 1928 Words

The Underlying Theme of Social Class and Order In literature, themes are carefully interwoven with other aspects of the story and are slowly unraveled as the plot advances to reveal to bigger picture. Authors use themes as a method to connect with their audience on a personal and relatable level. Each individual interprets the theme in their own manner depending on the past experiences they have had. Similarly, each author brings a sense of individuality and authenticity to their works, impacting their subject matter and area of focus, in this case specifically the theme. The Time Machine by H.G. Wells is a science-fiction novel in which the Time Traveller traverses the time dimension to the year 802,701 AD. He then encounters the†¦show more content†¦An author’s background is a prime factor in the subject of a book. H.G. Wells’ humble upbringing and political beliefs can easily be discerned through the writing. Wells grew up in poverty during the late 19th century in Kent, Great Britain, causing him to bec ome interested in class conflict. His socialist views come across in The Time Machine as it is his way to show the consequences of excessive capitalism, thus the theme of social class and order emerges. Wells uses evolution as a form to vindicate and reason the extreme schism of classes present in the book. The Time Traveller, which seems to be an extension of Wells’ persona, implies â€Å"the exclusive tendency of richer people [†¦] and the widening gulf between them and the rude violence of the poor† was a key factor in the splitting of the human species along class lines, a direct hit on capitalism (Wells 62). The Elois or the â€Å"Haves†, live aboveground the in comforts of their realm, while the Morlocks or the â€Å"Have-Nots† reside underground, as a result of the â€Å"[continual adaptation] to their conditions of their labour† (Wells 63). The Time Traveller continue to explore the future realm’s social order, discovering the radical differences between each class. For instance, the Eloi are focused on beauty and comfort, and are content on â€Å"living upon the labours of fellowman†, while the Morlocks assumed the role of the worker, relying on instinct and primitive desires (Wells

Mile and Time Downwind Distance Free Essays

1. A plane travels from Orlando to Denver and back again. On the five-hour trip from Orlando to Denver, the plane has a tailwind of 40 miles per hour. We will write a custom essay sample on Mile and Time Downwind Distance or any similar topic only for you Order Now On the return trip from Denver to Orlando, the plane faces a headwind of 40 miles per hour. This trip takes six hours. What is the speed of the airplane in still air? X = speed of plane in still air (x+40) = speed of plane downwind (x-40) =speed of plane against the wind distance = speed *travel time downwind distance = headwind distance 5(x+40) = 6(x-40) 5x+200=6x-240 6x-5x=240+200 x=440 mph So, The speed of the plane in still air is 440 mph if I am not mistaken. 2. Two bicycles depart from Miami Beach going in opposite directions. The first bicycle is traveling at 10 miles per hour. The second bicycle travels at 5 miles per hour. How long does it take until the bikes are 45 miles apart? D=RT 45=(10+5)T 45=15T T=445/15 T=3 hours. 3. Jesse rents a moving van for $75 and must pay $2 per mile. The following week, Alex rents the same van, is charged $80 for the rental and $1. 50 per mile. If they each paid the same amount and drove the same number of miles, how far did they each travel? 5+2m=80+1. 5m subtract 75 from both sides subtract 1. 5m from both sides .5m=5 multiply both sides by 2 m=10 miles . 4. During a 4th of July weekend, 32 vehicles became trapped on the Sunshine Skyway Bridge while it was being repaved. A recent city ordinance decreed that only cars with 4 wheels and trucks with six wheels could be on the bridge at any given time. If there were 148 tires that n eeded to be replaced to due to damage, how many cars and trucks were involved in the incident? Okay. There were 32 cars , we have x + y = 32 ars have 4 wheels so 4x , trucks have 6 wheels so 6x the total number of wheels adds up to 148, so 4x +6y = 14: x+y=32 4x + 6y = 148 -4x – 4y = -128 4x + 6y = 148. 5. For this question, you will need a parent/guardian or a friend. Have this individual grab a handful of coins making sure there are only two types of coins in the group (i. e. , nickels and dimes, quarters and pennies, pennies and dimes, etc). Your parent/guardian or friend should tell you the type of coins they’ve chosen, how many coins they have and the dollar amount of the group. From this information, you will set up two sets of equations and determine how many of each coin they have in their hand. Please send your instructor the name of the individual who helped you with this question, your two equations and the work you did to solve the system. She has 11 coins worth 83 cents. P and Q will the number of pennies and quarters, P + Q = 11 P + 25Q = 83 P + 25Q – P + Q = 24 Q = 83 – 11 = 72. So, 24 Q = 72 Q = 3. Q = 3 can be put into the equation to solve for P. If we use the first equation, we get P + 3 = 11 P = 8, so three quarters and eight pennies. How to cite Mile and Time Downwind Distance, Essay examples

Disclosure of Goodwill Impairment †Free Samples to Students

Question: Discuss about the Disclosure of Goodwill Impairment. Answer: Introduction: AASB 136 and IAS 36 Impairment of assets assure that an organizations asset is not written in the financial statement at the value which is more than its recoverable amount. The recoverable amount for the asset is higher among the value in use and the fair value less the disposal cost. Only exception to this is some intangible assets and the goodwill. All the organizations are required to conduct the test for impairment of its assets if there is any indication that the asset will be impaired. Further, the test can be carried on for the cash generating unit where the asset does not create any cash flow which is widely independent of those of the other assets (Linnenluecke et al. 2015). An organization shall assess at end of the each accounting period that whether any indication exists there for the impairment of any asset and if any indication is there, then the recoverable amount of the asset shall be measured. Various indications for impairment of assets are as follows External sources Reduction in the market value of the asset Negative changes with regard to markets, laws, technologies or economies Increase in the interest rate of the market Higher level of net asset of the company as compared to market capitalization Internal sources Physical damage or obsolescence The asset is held for disposal or it is idle or part of the asset is restructuring Worse performance as compared to the expectation Evidence required for impairment testing of Myers asset Flow of the asset it has been recognized from the given data flow of the company that the flow for all the stores of the company is either stable or has increased and for none of the asset any reduction trend is found for the past one year period. Therefore no indication of impairment is there. Asset base from the asset base of the company is recognized that the asset base for all the assets has not altered much and all the assets are maintaining more or less the same percentage of contribution towards total assets for last few years. Therefore, no indication of impairment is there (Malone, Tarca and Wee 2015). Asset turnover looking at the asset turnover ratio of the company, it is identified that the asset turnover ratio of Myer Holdings Ltd for the last few years are moving around 1.41 to 1.76. Therefore, it can be said that no significant increase or decrease is found with regard to the asset turnover ratio of the company. Therefore, this test also cannot establish that there is any indication for impairment. Procedures required to be addressed for determination of impairment AASB 136 for Impairment of assets requires the organization to annually test the assets for impairment and Myer holding Ltd follows this requirement. However, for testing the assets for the purpose of impairment, recoverable amount is found out through usage of value-in-use discounted cash flow model. This model utilises the cash flow forecasting on the basis of the financial budget that is approved by the management and it covers the period of five years. Further, the cash flow for the period of more than five years are extrapolated through usage of the terminal growth rate. Key assumptions utilised for the mode are as follows Rate of discount (pre-tax) at14.4% Rate of terminal growth at 2.5% Gross profit margin from operation at the rate of 39.5% Thereafter the management determines the fact that whether level of the future cash flows for the carrying value of the assets for the CGU of Myer further, during the period under consideration, the review for the assets carrying value for each of the store of the company is undertaken and identified whether indication of any impairment is exists. Where there is any indication, the assets recoverable amount was measured through discounted cash flow model. Major assumption for the model is consistent with the above mentioned assumptions. However, no impairment indication is recognized at Myer stores for the year ending 2016 of the companys operation. Information required for determination of impairment Other key information required for determining the impairment for Myer Holdings Ltd is as follows If the indication is there regarding an asset that it can be impaired, then the recoverable amount for the asset or for the assets cash generating unit shall be determined (Kabir, Rahman and Su 2017) The CGU or the asset is impaired on the condition that the carrying value of the asset is more than the recoverable value The recoverable value of intangible asset or goodwill with the indefinite useful life or the intangible assets those are not ready to be used on the date of report, are required to be valued at least per year basis, irrespective of the fact that there exists any indication of impairment or not. For the purpose of measurement, the recoverable value is stated as higher among the value in use and fair value less the selling cost (Bond, Govendir and Wells 2016) The amount of loss from impairment is identified as expense under the profit and loss account and is carried out at cost. Further, if the impacted asset is already a revalued asset under the permission of IAS 16 PPE (IAS 16) and the intangible asset (IAS 38) and impairment if any is 1st recorded against the revaluation recognized previously recognized as gains and then as the comprehensive income to the other assets. Wide disclosures are required for the rest of impairment and recognition of impairment loss (Guthrie and Pang 2013) Impairment loss that is recognized in the previous period for the goodwill or any asset must be reversed if any alteration is there with regard to the estimates that were used for determining the recoverable amount of the asset. Availability of flexibility from the management for determination of impairment It is recognized that the management of Myer Holdings Ltd is quite flexible in carrying out the tests for determining the impairment with regard to the asset. As per the requirement of AASB 136, they assure to carry out the test for impairment at least one in each year (Zhuang 2016). Further, the management determines various facts like determination of the fact that whether level of the future cash flows for the carrying value of the assets for the CGU of Myer. Moreover, the management carries out review for the assets carrying value for each of the store of the company is undertaken and identified whether indication of any impairment is exists. Where there is any indication, the assets recoverable amount was measured through discounted cash flow model. Major assumption for the model is consistent with the above mentioned assumptions (Bond, Govendir and Wells 2016). Further, the management of the company determines the recoverable value of the cash generating unit on the basis of VI U approach. Therefore, taking into consideration all these facts, it can be said that the management of Myer Holdings Ltd take active part and comply with all the requirements of AASB 136 for carrying out the procedures for impairment test and determination of impairment. Reference Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136.Accounting Finance,56(1), pp.259-288. Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment decisions by Australian firms and whether this was impacted by AASB 136. Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 20052010.Australian Accounting Review,23(3), pp.216-231. Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion under IFRS: Goodwill impairment in Australia.Journal of Contemporary Accounting Economics,12(3), pp.290-308. Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia. Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries: implications for asset impairment.Accounting Finance,55(4), pp.911-929. Malone, L., Tarca, A. and Wee, M., 2015. Non-GAAP earnings disclosures and IFRS.Accounting and Finance. Zhuang, Z., 2016. Discussion of An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136.Accounting Finance,56(1), pp.289-294.