Page 69 - EducationWorld March 2022

EW SPOTLIGHT FEATURE

Enigmatic Magic of Behavioural Finance

ysteries of our brain have puzzled that affect how people react to events and
human beings for centuries. information. Such insights are invaluable
MNeuroscientists and psychologists in building effective investment strategies.
are still trying to figure out how 86 billion Institutional and individual investors can
neurons and 100 trillion synapses work incorporate explanations for how bubbles like
in tandem to compute, comprehend and the dot-com era and the 2007 credit-fuelled
rationalize. Our thoughts, emotions and boom occur (followed by the inevitable
memories are controlled by the enigmatic crashes), or even how corporate scandals
3-pound brain. We make decisions in life like the ones at Enron, WorldCom, or Satyam
sometimes based on empirical evidence Computer Services occur. After all, the only
and also based on our emotions and biases. way to profit from market cycle or corporate
We tend to magically create mental short events is to understand the fundamental
cuts based on conscious and sub-conscious theories and models that underpins these
influences. It is specifically pronounced in changes.
financial decision making.
Financial markets are characterised by How Behavioural Finance studies help
volatility, with prices moving in cycles of A specialised Behavioural Finance course
peaks and troughs. Lately, liquidity fuelled Prof. Ram B. Ramachandran will help learners to:
booms and busts have become common Professor of Practice and Vice Dean • Understand the cognitive elements that
occurrences. In light of this, the assumptions O.P. Jindal Global University affect financial decisions
of ‘Rationality’ and ‘Efficient Markets’ • Identify the psychological factors that
have been in dispute, but now it is widely Individual and Professional Investment contribute to market behaviour and
acknowledged that much of this market As Individual investors ‘suffer’ from decision errors
volatility has its source in human behaviour behavioural biases, can they turn to • Understand how to adapt the process of
and its quirks rather than fundamentals professional investors? Well, professionals investment analysis, portfolio design, and
or quantitative factors. After all, what suffer from similar biases that afflict resource allocation using principles from
constitutes ‘markets’ if not their very human individuals. In fact, their biases many a time psychology
participants who make them up, technical results in overconfidence, familiarity bias and • Manage financial risks in a better manner
trading strategies and algorithmic trading disposition effect. Past performance is no • Learn niche, specialised, and advanced
notwithstanding? guarantee for future results. Many investors topics in wealth management, financial
and the markets rely on and follow ‘hot’ fund analysis, risk management, neuro
Analysing Emotions managers. The ‘hot-hand’ fallacy creates a finance, etc.
It is becoming increasingly necessary to self-fulfilling prophecy, which can then lead Graduates of such specialised courses
understand, analyse, and build strategies to wild swings when the fund manager goes can also target professional opportunities
around human emotions to the extent they ‘cold’. The current craze with cryptocurrency in a wide range of areas of finance and
move financial decisions and markets. This and Non-Fungible Assets (NFTs) are partially investments such as analysts, traders,
is where Behavioural Finance comes in. driven by crowd mentality. Can the wild portfolio managers, etc., at pension funds,
The broader aim of Behavioural Finance swings in these new investment vehicles be insurance companies, hedge funds, mutual
is to narrow the gap between the theory better predicted and managed? funds, and family businesses.
of rational investor decisions and their Perhaps one way to understand the value
actual behavioural abilities when it comes The need for Behavioural Finance of studying Behavioural Finance is that it
to making investment decisions. The The need for such specialised knowledge is helps us make more rational decisions by
formal study of Behavioural Finance helps becoming obvious given how much finance acknowledging our inherent irrationality and
to equip us with knowledge about the and economics have gained from insights benefiting from that of others!
principles of psychology of decision-making about psychological processes. Five Nobel
under conditions of risk and uncertainty. Prizes in Economics have been awarded Programs Offered by JGU
This specialised knowledge can then be for path-breaking work on cognition, nudge O.P. Jindal Global University offers an
deployed to formulate practical applications theory, market behaviour and decision innovative 2-year M.Sc. in Behavioural
for managing assets and constructing making, which now offers a deeper Finance program and 4-year integrated
portfolios. The knowledge is specialised understanding of complex human behaviour. Ph.D. in Behavioural Finance. This unique
since it combines two domains that are not The fundamental need for a structured and rigorous program combines Jindal
just technical (psychology/human behaviour Behavioural Finance course is driven by School of Banking & Finance’s finance-
and finance) but also as different as chalk the fact that it can help us understand how focused and data intensive approach with
and cheese! Thankfully, this niche field has financial decisions around investments, Jindal Institute of Behavioural Sciences’ spirit
received attention from serious academics savings, risk and leverage, are influenced of understanding psychological processes
from finance, economics and psychology. by human emotion and cognitive biases and human cognition.

EDUCATIONWORLD MARCH 2022