It is 100% certain that the investor will get a 000 return.Again, this is consistent with traditional market theory that states that investors will favour projects with the least amount of risk if the projects being considered all return the same amount of money.
It is also the main assumption behind the notion of behavioural finance. The role it plays in finance is that investors and others will make decisions quickly based on the ... Some investors could have a risk-loving attitude to risk meaning that they go for risky options regardless of the danger.
There are many reasons why an investor might not behave rationally and all these reasons are the basis of behavioural finance. Maturity – The amount of money promised to an investor that holds debt. This goes against traditional theory, which states that investors are risk averse.
Some investors can be over-confident, while other less knowledgeable investors might be prone to herding effects.
Shefrin (1999) was one such author to talk about behavioural finance.
Another reason for the irrational behaviour is that of the notion of ‘herd mentality’.
Many investors will invest purely because they think that others are investing there so it must be a good idea.
As observed by Shleifer (2000) ‘At the most general level, behavioural finance is the study of human fallibility in competitive markets.’ Behavioural finance incorporates elements of cognitive psychology into finance in an effort to better understand how individuals and entire markets respond to different circumstances.
Behavioural finance is based on the principle that all investors are not rational.
Behavioural finance attempts to incorporate elements of psychology into finance to better understand investor behaviour.
Essentially, behavioural finance operates under the assumption that all investors are not rational.