Exploratory Stugy of Behavioural Finance

Abstract

The field of behavioural finance emerged in the 1990s and takes a strong position in the industry of financial management since then. The theory of behavioural finance suggests that markets have similarities with human behaviour. Thus, in order to increase the predictability of the trends and learn the patters, the elements of bias and decision-making should be studied in more depth. The theory explains that calculations are not exhaustive for understanding the market activities. Moreover, trends and expectations change the financial markets.

This study has the aim to prove the benefits of behavioural finance for analysing the market conduct and predicting the possible market changes. The literature review and primary research explain how the knowledge of human behaviour can contribute to learning the market behaviour. The study approaches the financial industry from the standpoint of behavioural bias of the individuals in the market and how their expectations help to make sense of the market. The research assumes that behavioural finance principles allow creating the decision-making shortcuts and decreasing stressful conditions for the financial managers.

Keywords: behavioural finance, behavioural bias, decision-making shortcuts, trends in the financial behaviour.

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Chapter 1 – Introduction

Background Information

Behavioural finance explains how average people make decisions. They are prone to cognitive error, bias, and personal attitudes (Lewis, 2012). Therefore, the assumption that markets are the logical phenomena does not hold ground in financial studies. The reason for the claim is that the market is created and supported by regular people with specific industry knowledge. While hard theory can explain the numbers, the inferences and motivations behind the numbers require more than logical correlations perceived as the basis for market decisions (Kemtzian, 2009). The markets do behave as a consequence of behaviour showed by the market players. Due to the fact that people create the markets, financial behaviour requires a different approach from the traditional rational theory of the markets. The recent researches to find particular explanations for the market irregularities arrived at the irrational theory of the markets that share a common feature with the social science research (Voss, 2012). Thus, the theory follows the suggestion to approach the financial markets as a living being with some illogical but predictable activities.

For the purposes of current research, the key terms should be defined and explained to contain the project within the specific frame of analysis. Behavioural finance is a market theory that explains the financial markets from the standpoint of psychology. The field structures on the assumption that human participants influence the decision-making, the stock correlations, and the behaviour of the market. The rational theory of markets assumes that market players are the logical individuals that always make practical decisions supported by empirical evidence. Thus, the theory claims that all market activities can be explained by the rational choice, the maximization of benefit, and the highest self-interest factors (Reyna and Rivers, 2008). The irrational theory of markets claims that the markets are inherently irrational (Lerner, Li, Valdesolo, and Kassam, 2014).

Even the experienced professionals in the finance field fall under the influence of bubbles and scams, which suggests that the human factor is inevitable in the field. Also, the markets share collective perceptions, which is a basic phenomenon of social psychology. Therefore, irrational elements cannot be ignored in the financial market studies. Because the human factor is an inevitable element of the financial markets, logic and rationality approach has the knowledge gap (Kahneman and Tversky, 1974). The social and psychological study is a necessary factor in understanding market behaviours. Markets do not exist in perfect conditions, which is the assumption of logical theory (Bloomfield, 2010). Moreover, humans do not behave in the expected way that maximizes theory utility. Thus, the irrational market theory is more effective in the real financial markets.

The behavioural finance has numerous benefits for the individuals that have a grip of it. Firstly, accepting the fact that markets are prone to mistakes because people are prone to mistakes helps to exercise better control over an emotional aspect (Lerner, Li, Valdesolo, and Kassam, 2014). Secondly, psychological studies help to understand behaviours that influence the decision making in critical or regular financial situations. Thirdly, people create the circumstances for the market changes (Bloomfield, 2010). Through studying human behaviour, the financial market activities can be assessed. Last but not least, financial decisions require human participation. The knowledge of irrationalities and human imperfections can help to predict market changes and yielding profit.

Statement of the Purpose

The current study aims to define the benefits of behavioural finance as the new method of understanding the market conduct in order to predict the possible market changes. The research has the goal to explain how the knowledge of human behaviour can contribute to learning the market behaviour. The study approaches the financial industry from the standpoint of psychology and sociology (Voss, 2012). The research assumes that behavioural finance principles allow creating decision-making shortcuts.

The three hypotheses stemming from the general purpose of the research are defined as follows:

  1. Behavioural irrationalities help the financial analysts to make decisions in the time of uncertainty (H1).
  2. The financial experts decrease stress by relying on intuition or group advice (H2).
  3. Behavioural finance is more effective in understating the financial market than rational finance (H3).

Significance of the Study

The research project is an endeavour that attempts to argue that finance is a psychology-motivated field. The outcomes of the study will contribute to the knowledge pool of behavioural finance and irrational decision making in the financial industry. The findings of the study will be beneficial for the finance researchers, who are interested in irrational markets theory and behavioural aspects of the industry. Moreover, the conclusions expected to be drawn from the current project explain the financial field and market decision from a different point of view. It will contribute to the financial operations and learning and will acknowledge that intuition does play a significant role in market decisions.

The research will provide specific aspects of the decisions that need to consider the illogical and irrational elements instead of establishing the numbers only. Therefore, it will benefit the students of the financial fields by explaining the gut feeling and motivating them to combine logic and intuition. The study has significance for the workers in the financial industry as it will explain the areas of dangerous behavioural elements, as well as benefits of some psychology in the field.

Overall, the study will contribute to the knowledge pool of psychology, behavioural finance, sociology, social psychology, finance, economic theory, and economics. The research will be drawn from the aforementioned fields and will consequently contribute to their development and research base with its findings. Moreover, it will contribute to the practical suggestions in the industry of finance, investment, insurance, and even real estate.

Assumptions and Limitations

The theoretical framework entails rigorous research into social aspects of the finance industry. The connection between the social and psychological elements of decision making will be researched with scrutiny to derive the conclusions about the logical fallacies. The correlations between logic, intuition and decision-making process are to be found and supported. Then, the theory of irrational market behaviour will be taken as a basis for testing the hypotheses. The approach will limit the likelihood of over generalisation and research fallacies, as well as it will decrease the researcher’s bias. The interdisciplinary theoretical framework will help explain the meaning of the key phenomena, evaluate the nature of financial behaviours, and suggest the search for knowledge aspired for in the current project.

The assumptions of the current research are stemming from the expectations of the social science. The study expects the behaviour to be predictable. Although the research bases on the irrational theory of the markets, it still assumes that behaviours can be analysed, traced to their origin, and correlated directly to the outcomes. The second assumption is that the elements of behavioural finance are positive phenomena; thus, the drawbacks and challenges of the field will not be attended to. As the study factors in decision-making speed and beneficial consequences of the faster intuitive decision-making, the third assumption is that behavioural finance has intuition and social influence as important factors.

The limitations of the study include the constraints of the research methodology. As the hypotheses entail behavioural aspects, the qualitative research design is the most appropriate methodology. The limitations of the research design will be discussed in the subsequent chapters. The second limitation is the geographic scope of research, which is restricted to one reachable area. However, the limitations will be addressed through the suggestions for further research and ideas for improvement.

Structure of the Project

Following Chapter 1 – Introduction – that establishes the nature of the research and its guidelines.

Chapter 2 –Literature Review – presents the available condensed information pertaining to the topic. The chapter establishes the current knowledge base, defines the conceptual framework for the primary research, and outlines the key topics, under which the project fits.

Chapter 3 – Methodology – explains the selected research design, proves the need for primary data collection and presents the participants and methods of data collection with a specific reference to literature. Moreover, the chapter outlines the approach to data analysis and deriving conclusions.

Chapter 4 – Findings and Results – delivers the results of the data collection and evaluates similarities and differences in the findings that contribute to the conclusions. The chapter structures by the hypotheses that have been tested to improve the information flow.

The final Chapter 5 – Conclusions– evaluates the degree of research success through proving or disproving the hypotheses. The chapter also discusses the limitations of the research, their implication on the study, and provides the suggestions for further research.

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Chapter 2 – Literature Review

Introduction

The rational finance bases the decisions on the assumption that the markets behave in a rational, informed and efficient manner (Statman, 2014). The field of rational finance (classical finance, efficient theory of the markets) claims that all decisions are based on hard data, numbers, and predictable trends (Herfeld, 2012). However, the real market behaviour depends on the human factor to a large extent. Therefore, the understanding of sociology and psychology in relation to finance can create a new approach to managing the financial markets (Amin and Pirzada, 2014). The motivation for such an assumption is that the number-driven industry of the financial markets requires the logic and rationality to be effective and efficient, which is a one-sided perception of the finance world (Lewis, 2012). The utility theory bases on the claim that the choices require the analysis of the benefits based on individual utility (Nawrocki and Viole, 2014).

However, in the fast-paced and changing financial markets, the utility theory does not present the only approach to learning. At the beginning of the 1990s, the study of finance started incurring the changes. The econometric models that have been governing the field included the models of human psychology (Shiller, 2003). The scholars and professionals admitted that personal involvement and situational factors play a crucial role in deriving the most effective choice amongst the available options (Kengatharan and Kengatharan, 2014; Shiller, 2003). Therefore, the sphere of behavioural finance increases the probability of understanding and predicting market activities.

The situational circumstances, personal behaviour contribution, and social setting create a comprehensive method of approaching the market predictions and activities. The researchers concluded that traditional finance theory fails to account for human error (Shiller, 2003), which is motivated by two factors. The first one is the market agents are prone to deviations from standards. The second one is that the players are not able to have full updated information all the time (Amin and Pirzada, 2014). Therefore, the nature of the traditional rational theory of finance is not comprehensive and does not account for all aspects of the market changes. The altered and modified field of research and study emerged, which was called behavioural finance.

Behavioural Finance

Although predicting behaviour with complete accuracy is impossible, the long-term research into behavioural patterns and decision-making shortcuts suggest that regularities can be singled out (Krumme, Llorente, Cebrian, Pentland, and Moro, 2013). In the economics fields, the majority of studies have the tendency to assume that choices are rational and supported by evidence (Lyra, 2010). The strategy does explain the basic phenomena of the financial predictability but takes away the social context. In the financial circumstances, the influence of social factors shapes many decisions without the intent of a market player (Lewis, 2012). Consequently, understanding the social and psychological phenomenon and its influence on financial decision making can yield positive results by applying intuition or avoiding general bias.

Behavioural finance is a broad term that defines the deviations from efficient market theories and approaches (Statman, 2014). It provides insight into the irrationality of human decisions, and its influence on the financial operations and transactions. Behavioural finance does not substitute the logical and rational approaches to finance theory; instead, it aims to add clarity and completeness to the theory (Mitroi and Oproiu, 2014). It is motivated by the fact that the complete accuracy of predicting market behaviour is nearly impossible in the modern world (Ritholtz, 2014). The approach substitutes the rational paradigm with the assumption that some decision-makers may not be rational (Mandelbrot and Hudson, 2006); thus, their behaviour is not completely predictable and the outcomes may be surprising (Baker and Ricciardi, 2014; Herfeld, 2012).

The phenomenon delivers a combination of historic evidence, propositions of rational decision-making, and the potential for human irrationality (Statman, 2014; Bikhchandani & Sharma, 2001). Therefore, behavioural finance is an approach that steadily takes the place in the financial market predictions starting from the 1990s (Shiller, 2003). The following section provides a literature review on what are behavioural irrationalities and the four types of behavioural finance aspects that are important for the purposes of the capstone project. They include four researches irrationalities of extrapolation of past decisions, herding, overconfidence, and risk aversion.

Behavioural Irrationalities

In order to categorise the behavioural irrationalities, the clear definition of the phenomenon needs to be presented. Many previous studies have discovered that cognitive mistakes and behavioural fallacies contribute to decision-making and consequently alter market activities (Amin and Pirzada, 2014). The financial managers fall for behavioural biases and irrational motivations as much as regular people do (Montier, 2006). The term "bias" seems to entail a negative connotation; nevertheless, its goal is rather positive as it fills in the missing pieces of information (Baker and Ricciardi, 2014). For the purposes of the proposed research, the irrationality is perceived as having three necessary elements of behaviour and perception. The first inseparable factor of irrationality is stress. In order for a market player to fall under the influence of irrational decision-making, stress is a requisite to clutter the logical and rational thinking (Sadi, Asl, Rostami, Gholipour, and Gholipour, 2010)

The second requirement to be present in the environment of decision-making for irrationality to occur is emotional instability. The aspect stems from and is strongly correlated with stress. Uncertainty, stress, missing information and the fear of faulty outcomes create the conditions for emotional instability (Fuller, 1998). The context of emotional stress and instability creates perfect conditions for haste decisions, which entail making decisions without information (Trivedi, 2015). The aforementioned conclusion leads to the third element of irrationality, which are haste decisions that lack information or a sufficient understanding of the issue at hand.

There are other definitions of irrationality in cognitive psychology and behavioural finance. However, for the purposes of this project, irrationality is defined as an occurrence of cognitive nature that is motivated by stress, emotional instability, and haste decision-making. All three elements should be present for the phenomenon to be called irrationality. Moreover, the three factors are interrelated and interdependent, as any single one can cause other two or stem from each of them. They have no particular causative relationship, but in combination create behavioural irrationality and search for heuristics (Lyra, 2010). The following section defines the four phenomena that will guide the primary data collection and analysis.

Extrapolation of Past Decisions

The memory of previous experience has an influence on human behaviours. The extrapolation of the past decisions entails transferring the same patterns of decision making into the new set of conditions (Forbes, 2009). It is a heuristics approach that helps to shorten the time allocated for information search and decreases the stress (Alsedrah and Ahmad, 2014). On the one hand, it is an appropriate method to be employed in the periods of uncertainty to decrease stress and react to the challenging environment (Forbes, 2009). On the other hand, it causes a decision-maker to skip on information search and ignore the informed decision-making (Amin and Pirzada, 2014). In the scenario of the financial world, the extrapolation of the past decisions causes a person to disregard the available data to derive logical conclusions.

Instead, a financial manager applies the same strategy that has been successful in the past into the current situation without considering the alterations of the environment. The phenomenon can result in unexpected loss or gain. It is dangerous because it makes the person internalise the same decision-making pattern that also includes mistakes (Trivedi, 2015). The extrapolation of the past decisions is irrationality because it meets the three criteria: stress (pressure from requirements to make a decision on time), emotional instability (transfers the same approach to avoid information search), and haste decisions (done through applying the same patterns).

Herding Behaviour

Herding behaviour is the phenomenon, whereas a market player repeats the actions or decisions of the larger group. It is especially evident in the highly influential group of people. Social pressure is applicable to financial markets in the same way as in any other environment. Thus, the intra-group logical chain can be accepted by all members even if it is irrational or lacks sufficient evidence (Baddeley, Burke, Schutz, and Tobler, 2012). Another motivation for a herding effect is the desire to find a short-cut to the feasible decision. Consequently, the market player takes the side of a bigger group in order to avoid time-consuming information search (Bikhchandani and Sharma, 2001). The outcomes of the phenomenon are two-fold.

On the one hand, it decreases the time and resource constraint, which helps the player to make decisions quickly. On the other hand, it is prone to snap judgment and ignoring the relevant information. Therefore, herding behaviour can be a trigger and a hinder for financial market activities. Herding is termed irrationality in the context of the research because it is a response to stress (lack of knowledge), emotional instability (social pressure and the need to confirm), and haste decisions (repeating the same activities as other people do).

Overconfidence

The human tendency to recall only positive experiences and see oneself in a good light contributes to the behaviour in the financial world (Amin and Pirzada, 2014). Psychological peculiarity has two illusion causes. The first one is the wrong perception that one has more knowledge of the matter of decision-making than others. The second one is the illusion that a person can influence the overall picture alone (Montier, 2006; Barberis and Thaler, 2003). Therefore, the high self-evaluation creates the environment for making mistakes and falling for erroneous decisions. Overconfidence is a logical fallacy that decreases the likelihood of making a completely rational decision or even ignoring the facts because of high self-esteem (Amin and Pirzada, 2014).

The most spread effect of the phenomenon is appreciating of depreciating prices beyond their market values (Forbes, 2009). Overconfidence is dangerous to financial activities as it creates the artificial activities of the market that are not supported by facts. Moreover, this behavioural fallacy decreases the accuracy of prediction and calculations by involving emotional instability and haste decisions (Forbes, 2009; Barberis and Thaler, 2003).

The phenomenon that contributes to the influence of overconfidence is the January effect. The stock prices typically increase in January, which is stimulated by the growing interest in buying the shares (Klock and Bacon, 2014). Although the decision seems to be completely logical and free of bias, the aftermath affects the financial market in an unpredictable manner (Al-rjoub and Alwaked, 2010). The vertical and horizontal comparison of 90 firms in the United States proves that the January effect makes the market inefficient by decreasing its predictability and increasing hectic decision-making (Klock and Bacon, 2014). Moreover, the size effect entails the perception that smaller start-up firms provide higher investment returns as compared to established businesses (Hirshleifer, 2014). The Internet boom in the recent year was the motivation for the bias.

Although in some cases, the assumption is true, and the small companies provide higher returns due to the smaller number of investors, the risks associated with financing the start-up are significant (Garcia, 2013). Thus, the correspondence between risks and returns may not be the most effective one. Overconfidence is perceived as irrationality because it includes emotional instability (the desire to be better than everyone else), stress (competitiveness of the market and self-image), and haste decisions (faulty ideas that one knows better than anyone else).

Risk Aversion

People have the tendency to internalise their past experiences and refer to them in their decision making (Amin and Pirzada, 2014). The research shows that people have a higher likelihood to be afraid of the losses than be willing to expect gain (Montier, 2006). The factor creates the conditions when a person uses the fear of failure of previous experience of loss as a guide for today’s decision-making. It results in a situation when a market player ignores the hard data and falls for the perception. In the perfectly logical conditions of the market, the natural human ability to avoid risk would motivate the financial managers to diversify their portfolios and take the low risk-stable return approach (Forbes, 2009). However, the fear of regret tempers with the logical decision-making and motivates the irrational ideas that otherwise would not appear (Amin and Pirzada, 2014).

For example, the previous experience of failure in the investment can create an avoidance strategy to invest in a similar company through ignoring perfectly promising ratios. It is a realistic strategy that forms the basis of behavioural finance due to the fact that the phenomenon is innate in human nature (Alsedrah and Ahmad, 2014). Thus, risk aversion decreases the market predictability because of human emotional instability and stress from the previous failures. It is evidenced to surface in all areas of human activities, including the different financial scenarios (Disatnik and Steinhart, 2015). Risk aversion is termed as irrationality for the purposes of this research because it consists of stress (the fear of committing the same mistakes and facing failure), emotional instability (the avoidance of the strategies that hinder normal functioning), and haste decisions (make it to the safe space fast).

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Conceptual Framework of the Research

A conceptual framework is an approach for advancing the available pool of knowledge in order to make use of the primary data (Ravitch and Riggan, 2011). It combines the findings of the literature review to unite into the single method of analysing the collected data and defining the patterns. The conceptual framework for this research project incorporates the elements of behavioural studies in the area of decision making, the social influence phenomena, and the financial market behaviours. The explanation behind connecting the three areas of research is that the markets are influenced by the individuals, who show specific patterns of behaviour.

The predictability of behaviour is a complicated topic, especially when involving different aspects of social phenomena. The aggregate patterns can suggest some probability of scientific repetition (Krumme, Llorente, Cebrian, Pentland, and Moro, 2013). However, the predictability lacks sufficient empirical evidence and hard data, as deviations happen to depend on the size of the sampled patterns. The conceptual framework aims to single out the number of important variables for the current research project (Ravitch and Riggan, 2011).

Key Variables

Decision-making faces constraints of various degrees, which stimulates the appearance of shortcuts (Krumme, Llorente, Cebrian, Pentland, and Moro, 2013). The shortcuts or heuristics is the approach that decreases time and effort dedicated to the process, as well as eliminates the stress of evaluating the potential consequences of each alternative (Lewis, 2012). In the economic environment, heuristics usually helps to solve the complicated problems in the time of uncertainty or in the case of the limited information available (Lyra, 2010). Heuristics is the strategy to shorten the decision-making process and utilise the benefit of assumption or intuition (Dietrich, 2010). It decreases the time for collecting and assessing information, analysing the environment, and comparing the alternatives. It ensures that the decision-maker uses the judgment of available data to derive the solution faster. The phenomenon allows creating timely and effective solutions and faster decision-making (Boussaidi, 2013).

It is particularly beneficial in the fast-paced field of finance, where every minute can be worth millions of dollars (Sadi et al., 2010). Although rational decision-making yields more stable results, it requires excessive data collection and unbiased analysis. As the financial market players do not always have the luxury of time and resources, heuristics can assure an increase in the outcomes (Lyra, 2010). Therefore, decision-making heuristics is a positive phenomenon in the available research in the financial field that improves the newly collected results. The first variable in the current research project is financial decision-making heuristics.

Behavioural finance is the innovative method of making financial markets less intimidating for regular people (Baker and Ricciardi, 2014). When professionals can make sense of the financial information in a timely and effective manner, average individuals face challenges when interpreting the data and making sensible decisions. The expectation, intuition, and social dependency create the opportunity for faster decision-making that is not necessarily faulty (Chira, Adams, and Thornton, 2008). The financial markets are incongruent with the rational theory of choice (Lyra, 2010) and maximum utility theory (Nawrocki and Viole, 2014). Thus, the third element of behaviour should be factored in for the purposes of increasing the knowledge base. The second variable in the current research project is the benefit of bias.

However, overconfidence and excessive reliance on bias lead to negative consequences (Kengatharan and Kengatharan, 2014). Even the professionals can fail to account for the changing factors in the financial markets, which add to the failures in the decision-making and monetary losses (Sadi et al., 2010). Therefore, finding the golden middle between the rational theory of markets and biased market perception is the goal of behavioural finance. The third variable in the current research project is the drawback of bias.

Conclusions

Heuristics for speed of solution and the convenience of the process are the two crucial elements in creating the decision-making shortcuts (Dietrich, 2010). When a person faces the alternative of familiarity, he/she tends to lean towards the known factor. Thus, if the new information does not internalise, the same decision is likely to repeat in similar circumstances (Milkman, Chugh, and Bazerman, 2008). Moreover, the law of reward is an effective explanation of behavioural finance. If a decision or activity has brought positive outcomes before, it is likely to be repeated again (Lewis, 2012). The case contributes to the appearance of the behavioural finance phenomena that are repeated on the regular bases. The biases work in a positive manner, which ensures the creation of a pattern. Moreover, decision-making errors are costly, and their costs can increase even more if the same mistake persists (Milkman, Chugh, and Bazerman, 2008).

The logical fallacy that has been internalised for some time creates the complete chain reaction and results in excessive expenses in future decisions. Despite the numerous different elements of behavioural finance that influence the markets and decisions, the holistic approach seems to be the most appropriate way of making sense of the market (Shiller, 2003). Although behavioural finance makes a lot of sense in the real world, there is no need to ignore the calculus and logic of financial behaviour. Therefore, the overarching goal of this research is contributing to the existing models rather than refuting them.

The separate investigation of the interconnected variables ensures the rigorous analysis of their importance and value in the given circumstances. The interconnectedness of the defined variables will establish a further approach to the primary investigation. Decisions based on experience may actually cause the problems, as the mistakes keep being repeated (Ervolini, 2009). The pure logic and statistic behaviours are also prone to ignore the unstable conditions of the markets. Financial markets are multifaceted and influenced by the non-controllable aspects (Mandelbrot and Hudson, 2006). As the project is extensive and interdisciplinary, the framework needs to be narrowed down to assure the potential to be fulfilled (Ravitch and Riggan, 2011).

Moreover, the literature search has proven that the topic of the decision-making shortcuts in the financial markets is under-investigated from the standpoint of its benefits. Therefore, the discovery reassures the importance of the current project by proving its value for the field of behavioural finance. The nature of the research is suggestive and pioneering because it will define the orientation for further research into the importance of learning human behaviour as the guideline for financial behaviour predictability.

The economists can take the approaches to study the economic phenomena as behavioural psychologists. The researchers ask questions, receive the answers, and observe the reaction (Lewis, 2012). The method ensures that logic and intuition are correlated for the achievement of the best results. Thus, the current project assumes the approach of social sciences, as it is based on behaviour. Because the markets behave, act, and react to decisions and activities, the research approach should also evaluate the behaviours, actions, and reactions in order to possess comprehensive knowledge.

Chapter 3 – Methodology

Introduction

The purpose of the current study is to deepen the available knowledge base in the area of behavioural finance. The area is an emerging discipline that requires intensive research and evaluation in order to define the borders of the topic (Chira, Adams, & Thornton, 2008). Therefore, the discipline requires an interdisciplinary approach to address the multifaceted aspects of finance, psychology, sociology, and behaviour. The term interdisciplinary approach entails that the study draws information from more than one discipline (Repko, 2011). This research draws the literature review from finance and psychology, as well as touches upon sociology through defining social influence. The selection of methodology of the current research is motivated by the two major factors. Firstly, the psychological foundation taken as a key variable requires the application of psychological research methods (Forbes, 2009). Secondly, behavioural finance is an emerging field that does not operate in the conditions of informational availability; hence, it calls for the exploratory research design (Kemtzian, 2009).

The current research collects the data through one-on-one expert interviews. The questions are formed on the basis of the secondary data findings collected in the Literature Review chapter. The review of available data suggests that the behavioural finance field has a strong correlation with psychology and sociology (Kahneman and Tversky, 1974). The non-measurable elements of the aforementioned disciplines propose the application of the qualitative research. The research methodology entails qualitative data collection and comprehensive analysis of the findings to derive open-ended conclusions and suggestions for further investigation.

The choice of approach is justified by the fact that the data collection attempts to assess the aspects of decision making and the human motivations that guide financial decision-making (Myers, 2013). The nature of the field and the prominence of qualitative studies in behavioural finance, including the studies by Amin and Pirzada (2014), Nawrocki and Viole (2014) and Kengatharan and Kengatharan (2014) evaluated in the previous section, suggest that qualitative research method is the most appropriate design. The choice allows creating informed conclusions that can guide further research and explain non-measurable phenomena (Myers 2013).

Research Design

The project employs a descriptive study type with the elements of correlational kind (Kothari, 2004). The reason is that the project has the aim of describing social phenomena with the aim of deriving a suggestive conclusion that can motivate further investigation. The research attempts to collect the self-evaluating data from the human subjects by referring to their previous experience and personal judgment of their actions (Ryan, Scapens, Theobald, and Beattie, 2002). At the same time, the study includes the elements of the correlational study type through endeavouring to address the research hypothesis that implies behavioural influence on the outcome (Kothari, 2004). At the same time, the research design does not have a pure correlational character, but rather intends to suggest correlations for further investigation.

As the research goals are to investigate social phenomena and behavioural practice, the most applicable strategy is qualitative research methodology (Kemtzian, 2009). The study has the goal to assess the behavioural influences on the financial markets. It includes the elements of social structure, psychological phenomena, behavioural sequences, and correlations. Due to the reason that the study has an exploratory idea in essence for the purposes of suggesting further areas of research, qualitative research methodology presents the most effective and suitable strategy (Ryan et al., 2002). The qualitative methodology has a number of strong factors that motivated their applicability for the proposed project.

  1. Firstly, the method offers flexibility due to the involvement of the researcher and exploratory non-suggestive view on the hypothesis (Creswell, 2012).
  2. Secondly, it presents the opportunity to research established concepts and discover new phenomena in the field of behavioural finance that is relatively unexplored (Ryan et al., 2002; Lewis, 2012).
  3. Thirdly, the method is applicable for the involvement of the individuals that can share insights into the defined phenomena (Creswell, 2012).

As assumptions of the research necessitate the participation of human subjects, the qualitative design offers a comfortable approach for both the researcher and the participants.

The research tool selected for the research is one-on-one interviews with experts in the field of finance and investment. The selection is supported by the claim that interviews allow collecting in-depth information and detailed opinions about the manner from the limited number of participants (Kothari, 2004). Also, the tool proposes a semi-structured procedure that works effectively in the circumstances of limited knowledge and desire to gather extensive information (Creswell, 2012). By using the prepared questions, the researcher can go from the given answers to collect some unexpected pieces of information. In the event of the emergent social research area, such as behavioural finance, the expert interviews allow gathering priceless data from the experienced people that would not manipulate the responses to their preferences (Creswell, 2012).

The pre-defined questions to begin the conversation base on the assembled literature and aim to guide the interview rather than manipulate the responses. The questions were derived from the previous studies on behavioural bias and risk aversion conducted by Montier (2006). Also, the contributing research to the creation of the interview guide was the projects by Chira, Adams, and Thornton (2008), and Barberis and Thaler (2003). The three aforementioned studies formed the basis for the interview conduction. The research tool follows a semi-structured format (Ryan et al., 2002). The interview guide has the basic four questions to guide the conversation, but the interviewee will be welcomed to turn the discussion in an individual manner. The responsibility of the interviewer is to keep the conversation within the framework of the current research. The professional approach to data collection and interview conduction will ensure that the conversation contributes to the analysis of variables in the project.

The One-on-One Expert Interview Guide

The following questions that guided the interviews for the purposes of collecting information have been derived from the literature review. Particularly, the studies by Montier (2006) and Chira, Adams, and Thornton (2008) created the frame of reference. The aforementioned studies suggested that asking indirect questions that touch upon the desired factors allow the participant to openly respond to them (Myers, 2013).

  1. What are the principles of investing you employ in your daily activities?

The question aims to address the decision-making shortcuts in the financial activities that based on some behavioural bias and social influence. The researcher attempts to find the basis for decision making and conclude whether the respondents use logic or sense to make decisions.

  1. Please give a couple of suggestions for the aspiring financial manager? What are the key skills of an expert in the field of investing?

The question attempts to collect information about the practice and inquire about the historic approach taken by the financial manager interviewed. It also plans to inquire regarding possible mistakes and the methods to solve them, as well as stimulate the conversation about the drawbacks and benefits of particular decisions and the value of experience in the field.

  1. What is the worst financial situation you have encountered? How did you deal with it?

The question has a goal to collect data about bias and situational stress related to the field of finance. Direct asking about the challenges is expected to stimulate information sharing about decision-making shortcuts and stress resolutions strategies showed by the participants. The question frames the discussion related to the stress-resolution tactics and the role of bias in their formation.

  1. What financial advice would you give to a person, who wants to invest 10,000 today? Why?

The question motivates the conversation about previous experience and information required for the proper decision-making in the financial world. The question is expected to collect data about the importance of hard numbers and logic, as well as psychological factors and previous experiences in the process of building a career in the financial field.

Research Hypotheses

The methodology is grounded on the three hypotheses that guide the definition of questions for the one-on-one expert interviews and subsequent response analysis. The first hypothesis suggests that behavioural irrationalities help the financial analysts to make decisions in the time of uncertainty (H1). The hypothesis requires collecting data that is self-reflective and based on the previous experience. Although the interview guide does not directly ask for recalling previous behavioural irrationalities, it implies some personal experience sharing during the conversation. Moreover, the researcher expects the participants to share stories during the course of the interview.

The second hypothesis is that financial experts decrease stress by relying on intuition or group advice (H2). The idea of behavioural finance incorporates the elements of social psychology and behaviour expectations. The second hypothesis suggests that social pressure and common group perception can motivate particular elements of the decision-making process. The research expects to prove that social relationship and advice help to reduce stress in the period of uncertainty while making the decisions in the financial market. The research does not intend to give the judgment evaluation to the hypothesis by defining the process as good or bad. The interviews aim to prove the reference to the group in the period of stress and job pressure for the guidance in decision making.

The third hypothesis is that behavioural finance is more effective in understating the financial market than rational finance (H3). As rational finance states that market behaviour is logical and rational, behavioural finance suggests that it is contextual and socially influenced (Statman, 2014). The hypothesis suggests that the field of finance is better understood through internalising the behavioural aspects of the financial decisions rather than accepting logic as the only virtue. The research attempts to prove that behavioural finance equips with the necessary knowledge of the market changes that assist in deriving conclusions and predictions.

Participants

The research subjects are individuals involved in the field of finance through investing, teaching, or studying the field. The population includes financial specialists, who are brokers, dealers, commercial bank analysts, insurance company workers, and savings and loan associations, employees. Appendix 1 shows the participant profile and the relevant data about them. The profile of the participants is not restricted to age, gender, academic achievement or other demographic and psychographic factors. The participants need to have experience in one or more of the aforementioned fields of work of 5 or more years. They do not have to work in the same field or company for the complete period, but they are required to have minimum of 5 consecutive years of employment with a maximum 1-month break between the jobs. The population is restricted to the individuals, who currently occupy the decision-intensive managerial position as defined by the job title. The geographic location is restricted to the United Kingdom due to time and resource constraint.

The selected participants were contacted by e-mail for confirmation of the experience requirement and agreement to participate in the research study. The total sample of participants consists of six experts in the different areas of expertise. The scope of the qualitative exploratory research that is limited in the geographical location allows the employment of a relatively small number of participants (Myers, 2013). The goal of the data collection is to explore the hypotheses and suggest the motivations for further investigation. The chapter presents additional data about the ideas of further research derived from the current sample size. Due to confidentiality assurance, the names of the participants and their employment places will not be disclosed in the capstone project. They will be referred to by the numbers allocated by the researcher to every interviewee.

Data Collection

The research findings will be compiled from four one-on-one executive interviews with the managers in the financial field. The researchers used four open-ended questions for each expert to collect responses. The questions were utilised as a means to guide the conversation rather than collect similar answers. The role of the interviewer is to keep the conversation within the frame of interest, but not to manipulate the flow of discussion. The interviews were recorded and disseminated for deriving at comprehensive conclusions. The informed consent was distributed to the participants before the actual interview for ethical purposes.

Data Analysis

The collected raw data was transcribed for interpretation purposes. The researcher defined some marks and term notes to approach the analysis of extensive data and find some similarities. The conceptual map was created based on the findings to contribute to the wholesome understanding of the elements. The conceptualisation continued to filter the findings as the contributing claims to support or refute the established hypotheses. The data analysis approach did not account for the personalities of the experts in interpretation. The coding system contributed to the objectivity of results. The responses were separated into subcategories corresponding to the conceptual map. It included the thematic analysis based on the factors analysed in the literature review (Meyers, 2013). The themes were divided into five subcategories (four biases and decision-making process) and then grouped. The codes were developed to note the subcategories and combine them together (refer to Appendix 3 for more information). The responses were transferred to confirm or refute the matching hypothesis.

Conclusion

The concepts of internal and external validity of the undertaken study are the crucial factors determining the effectiveness of the study. The internal validity is the ability of the study to explain the causative relationship of the variables (Ryan et al., 2002). The phenomenon is assured through addressing the first and second hypotheses that assume cause and effect relationship. The researcher addresses the variables of stress and decision making speed by discussing them with the participants. Each interview attempts to define the relationship between two variables, one of which can cause a change in the second one. On the other hand, external validity assesses the generalisability of results (Ryan et al., 2002).

The qualitative methodology has low generalisability of the outcomes in its essence. However, the goal of the current project is to investigate the area for the ideas for further research that can yield higher generalisability of results through the application of a larger sample, quantitative approach, and statistical testing. Due to the fact that the research has an exploratory aim, the external validity will be guaranteed through using the same interview guide for all participants, ensuring similar conditions for the data collection process, and ensuring no manipulation of data on the side of the researcher.

Validity is ensured through theory triangulation, which ensures that the phenomenon is looked at from the different standpoints (Denzin, 2006). Triangulation of data will be attempted through finding similarities in the responses and reporting on them as accurate only in case of repeating the same claim in at least 50% of the interviews. As the research includes social psychology, social theory and financial behaviour as the approaches to data analysis, validity is increased through different theory application. The data collected is examined from the three approaches and frames of reference derived from the empirical conclusions in the literature.

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Chapter 4 – Findings

Introduction

Each interview had a different spirit, tone, and major topic, as it is typical for the one-on-one semi-structured interviews (Brinkmann, 2013). Nevertheless, the crucial aspects related to the study of finance and its behavioural aspects seemed to have the common ground across the interviews. The approach to studying behavioural finance in the given circumstances does not incorporate asking direct questions for the purposes of decreasing potential bias. Therefore, the answers revealed important pieces of data throughout the conversation. The important observation made during the interviews is that the participants used to avoid talking about one’s mistakes and did not agree to admit that they are prone to bias and errors. Although they tend to agree that the markets can be unexpected and the job is stressful, they still prefer to concentrate on their professionalism.

The second commonality shared among the participants is that they agreed to the fact that markets are somewhat uncontrollable. They suggested that it is possible to evaluate the facts and make proper decisions, but occasionally, the market activities do not follow the logical way of development. Thus, the participants allegedly agreed that the markets do behave, but their behaviour can be explained and mostly predicted.

The following section provides a detailed overview of the major themes and ideas derived from the interview analysis.

Major Topics

Expectations

The discussion of career opportunities and the ways to achieve success in the financial world presented many interesting opinions that guided the interviews. The interviewees allegedly concurred that it is impossible to take the expectations out of the profession. The human factor plays a crucial role in the market behaviour, which in turn motivates the changes and perceptions of the industry alterations. Professionalism contributes to the decrease in the influence of expectations on the job-related activities that lead to overconfidence. However, the respondents advocate that expectations are the basic elements of the industry, as explained by P3:

“Clients trust me with their money because they want returns on their investments. They have the impression that I will double or triple their capital. We have a double-sided relationship because I also hope that they will pay me a high commission.”

The remark also confirms that financial jobs include significant contact with human subjects. They are not only clients, but also partners, co-workers, and other stakeholders. Each group has the expectation of the market behaviour and of the decision that the employee should take. The combination of plans and expected returns creates the environment of quasi-certainty. The term explains that the workers in the financial field have a strong expectation of the market, which is partly supported by the calculations. At the same time, their assumptions would fulfil in the future. Therefore, the certainty in the decision-making is not complete, but feasible for the purposes of management.

Another common deviation of the topic is the idea of the market failing to meet the expectations from time to time. The participants took responsibility for the market-related mistakes as they agreed that sometimes one does not collect complete information about the situation before making a decision. However, the complete information does not guarantee the accurate prediction of the future, as confirmed by P4:

“You cannot be 100% sure of your investment decision. I have been in awkward situations when all my calculations failed me, and when just a gut feeling made me a lot of money. It [market] is like an informed lottery: you need to have both knowledge and luck to make it.”

The remark leads to the proposition that financial planning bases on the data collection, the analysis of the available factors, and the assumptions derived from knowledge and expectations. The human factor is not completely detached from the market activities as the individuals on every step of the process contribute their knowledge, ideas, and expectations. Moreover, the participants in the study confirm that the expectations fail the market players regularly. Thus, the acceptance of the potential discrepancy between expected financial and actual financial behaviour can decrease the stress on the job, and appreciation of the achieved results. The conclusions motivate the following discussion of the common topic among the interviewees, which is the decision-making process and outcomes.

Decision Making

The prediction of the market requires the knowledge of financial strategies and the evaluation of multiple factors to derive the definite conclusion. The informed decision and methodological learning do bring results, especially in the conditions of free data availability. In order to be prepared for market behaviour and financial changes, the professionals have to understand the volatility of the industry. In particular, volatility can be motivated by numerous factors, which are usually not controlled by a single individual.

“They [new professionals] have to be ready to negotiate, especially in the world of numerous changes. We work for people, who have the money. And their view on what is good or bad may be very different from ours” (P6)

Decisions employ a complex model of thinking with many different variables. The customer-related fields of finance are dependent on the human factor. As explained by the P6, people's skills are as important in managing financial activities as are the calculations and historic ratios. At the same time, the decision-making in the aforementioned fields is not a stable phenomenon that has the responsibility for a single factor. In fact, the lucrative or failing consequences result from the cooperation of multiple players in the markets and numerous environmental factors. The common discussion among the participants was the ability to adapt to the changes and embrace the volatility of finance as a field. 5 out of 6 interviewees agreed that information search for the financial markets is extensive, and is not typically followed to the letter. The predictions based on the historic facts are the major ground to arrive at the final decisions.

“It [the job as a fund manager] is calculations and predictions. I calculate and I prove my decision to be the best alternative. But even the brightest minds miscalculate” (P1)

The remark suggests that the financial markets can meet miscalculations due to the element of uncertainty. As discovered through the literature review, many finance-related activities are oriented towards long-term yields. The future projections are not deemed completely true until they take place. Thus, the decision making in the financial field always has an element of uncertainty and potential for error. The challenges of the process and the ways of accepting them as a part of the career were the common topics. It is possible to disseminate four common conclusions in the interviews as related to decision-making.

  • finance can be predicted in the majority of cases. The unexpected situations occur from time to time, which is the fact that needs to be accepted;
  • human influence cannot be taken away from the industry. The markets are created by the people who are not perfect and cannot be predicted with complete proof;
  • as a future-oriented field of business, finance has a place for trial and error, which can be decreased (but not eliminated completely) by the information search, historic calculations, and experience in the industry;
  • intuition and experience admittedly contribute to the quality, speed, and effectiveness of the decisions in the financial fields.

In relation to the topic of decision-making and uncertainty, the researcher did not attempt to collect additional information, as it deserves a completely new project dedicated to the concept. However, the brief mentions of the process and information availability shed some light on the perception of finance as a field and its information gaps and individual attributes.

Biases and Social Influence

The participants shared pieces of information that revealed to be related to the field of behavioural finance. Particularly, the interviewees allegedly confirmed the role of bias and social interaction in the process of work. They did not claim openly that social influence can change their opinions and decision. Neither did they suggest that they are prone to bias. However, most of the interviews touched upon the inevitability of social and psychological factors, even without the participants noting the remarks.

Extrapolation of Past Decisions

The important factor of behavioural influence on the market behaviour was admitted by all participants. They agreed that they extrapolate the trends and ideas that worked in the past into the current decisions. The participants confirmed that many activities in their job are similar to one another, which helps to create some kind of algorithm that is re-used regularly to decrease the stress of information search. P2 openly confirmed the assumption, while other interviewees mentioned the same phenomenon in a more controlled manner:

“Of course, everyone says that [that they search for all available information], but for the most part, investment professionals learn a couple of strategies that work and keep doing them. It is as simple as selling a losing stock when it starts dropping. It may not drop all the way, but it probably will.” (P4)

The aspect of cutting the edges and transferring the same decisions to the different conditions proves the individual bias in the financial markets. The human error is present in the industry; however, the persistent human error can create market smackdowns and serious problems. Moreover, the affected side may not be limited only to the person using the same strategy again and again. Therefore, detecting the lack of creativity or persistent error-making is an important ability for the workers in the finance field. Nevertheless, it is worth admitting that the extrapolation of the past trends helps to react faster in the conditions of limited information.

“Of course, you need to learn the shortcuts. It comes with experience: sometimes it is enough to look at the graphs, and you know – it will make you a lot of money. And there are timeless easy ways of investing in the well-known stable businesses. You know they would not pay millions, but they are safe”

As it becomes clear from the excerpt, P4 suggests that previous knowledge assists in decision making through providing information that otherwise may be lacking. In the event when the time taken for the decision matters, the use of previous experience and repetition of the same patterns helps to decrease the time. Additionally, the approach helps to utilise the previously collected information for the benefit of the current decision making. The phenomenon is known as anchoring, which is a phenomenon of behavioural finance.

Herding Behaviour

Another important phenomenon discussed by the professionals interviewed is herding behaviour. Although the research participants did not admit to committing to the socially-motivated behaviours, their interview responses suggested the opposite. Herding is the social phenomenon that motivates the people belonging to the group behave in a similar way as other group members. The participants confirmed that they rarely go against the group decisions and suggestions, as they are afraid to be misunderstood or not to be accepted. Moreover, they think that social interaction allows sharing experience, collecting the missing pieces of information, and benefitting from the advice of others.

“Sure we do [discuss the future work plans]. We also ask for advice and note co-workers decisions. It helps to make the right decisions after discussing them.” (P4)

The method contributes to the professional ability to collect useful information from various sources, including human subjects. However, herding is risky as it motivates people to repeat the same errors that have been done by co-workers. The interviewees shared some stories about collective mistake-making, especially when trying to find the responsible person. The situation turned out to be a challenge, as the collective mind makes the intra-group members share the common perceptions. The case is applicable not only to intra-group relationships. In fact, the same results can be obtained from industry information. It creates the condition of repetitive behaviour and even can result in panic. P5 confirmed the case from his experience:

“In our company, we have heard a rumour about an equipment malfunction in one of the mines. The losses would have been terrible. Everyone started to react by selling the shares. The information was not right, but the share price was dropped down bad.”

The case exemplifies that herding is a problem when the information is not correct. It can create personal bias and resistance to accepting the right data. On the market level, herding can result in huge changes and negative phenomena, as evidenced in the quote above. However, herding can create a benefit for the communication between the experienced and non-experienced workers. The findings are correspondent to the research by Bikhchandani and Sharma (2001) who attempted to prove that herding has both positive and negative effects.

Overconfidence

The participants shared the common perception of oneself or one’s profession as above average. The phenomenon is known as the bias of overconfidence. The participants gladly shared stories of challenges they have faced and overcome and did not admit to having any bias common for the market behaviours. Most participants provided a subjective assessment of their talents and abilities, which was not praised but rather conversational identification of one is above average. For example, P2 stated

“I think that the professional can control the market with the right set of skills and knowledge. I managed to learn my tricks, and I rarely fail in my calculations”

The remark proves that financial managers perceive their decisions as being correct and appropriate, which is a clear sign of behavioural bias. The problems stemming from overconfidence are numerous, as other behavioural and perception biases can result from it. The interview analysis provided insight into the ability of the managers to use their previous success as a benchmark in their future career. The approach allows them to react to the market changes quickly and make decisions faster due to sufficient confidence in their knowledge and skills. The peculiar discovery was that participants seemed to understand that the markets are unexpected and the finance workers should not neglect common sense and the value of education:

“[One should] start with the familiar frame of reference: know the market, the firm, or the industry, and go from there. The mistakes will happen, but they should not discourage a new investment manager. Just try not to allow huge mistakes that cannot be rectified” (p.4).

At the same time, they admitted their achievements more willingly and avoided discussing failures openly. The finding agrees with Montier’s (2006) claim that the immunity to behavioural bias is not granted in any profession. It leads to the further assumption that finance is a field motivated by bias, as it is created by the people who are prone to mistakes. Thus, it confirms that finance is strongly connected to the behavioural elements of human nature, and cannot be considered separately from its influence.

Findings by Hypotheses

Hypothesis 1 – Proven

H1 assumed that behavioural irrationalities help the financial analysts to make decisions in the time of uncertainty. The research findings touched upon the information limitation and stress of the financial industry that motivates the individuals to search for the different approaches to made decisions in an effective and timely manner. The extrapolation of the past decisions, risk aversion, and the role of expectations has been correlated to the H1 to contribute to its development. In fact, the past decisions create the cushion for the current decisions in the uncertainty times, when there is no sufficient data to make the informed decision. A risk aversion phenomenon is common for the people of all professions, as it helps the market players to avoid the same mistakes and taking unnecessary risks. Expectations contribute to higher interest in the outcomes and the value of effort in the times of inadequate conditions.

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The three aforementioned phenomena are considered behavioural irrationalities because they involve emotional instability, stress, and haste decisions. They are proven to guide decision making in the financial field. In order for irrationality to occur, the conditions should correspond to the stressful ones: limited data, time constraints, or psychological stress. Otherwise, the chances of behaving in a rational and logical manner are high. Conclusively, the three studied behavioural irrationalities help the financial professionals make the decisions in the time of uncertainty and restrained environmental conditions. Thus, H1 has been proven.

Hypothesis 2 – Partially Proven

H2 suggested that financial experts decrease stress by relying on intuition or group advice. The research discovered that herding behaviour is attributable to different players in the financial markets. At the same time, the participants did not admit for behaving in the same way as other people do; they preferred to concentrate on their individual achievement rather than group success. The research exposed the non-ambiguous remarks of the participants that they discuss the market in the groups and derive the common conclusions. Although the interviews relied more on individual perceptions, ideas, and behaviours, the participants agreed that experience sharing is an inevitable part of the profession, as well as historic knowledge and expertise.

The findings indicate that workers in the financial field, with no regard to their field of expertise, admit that they participate in the group decision-making and collect advice when needed. Moreover, the research confirms that expertise sharing and training of younger employees is a priority for the field of finance. The interviewees agreed to have had mentors or guides on the job that taught them the profession. However, the findings are not conclusive to prove the hypothesis, as they are not sufficient to claim that the market players rely on the group advice. Instead, the hypothesis needs to be refined to meet the findings of the qualitative research to state that financial experts rely on group, institution, or expert advice in the establishment of the career and in times of doubt (H2). The redefined H2 has been proven by the findings.

Hypothesis 3 – Proven

H3 assumed that behavioural finance is more effective in understating the financial market than rational finance (H3). The literature review has been grounded on the fact that the market is created and ruled by the people who have a tendency to behave in an irrational way. The primary research discovered the evidence that the individuals involved in the industry are prone to the same behavioural bias and social influence as average people. It is worth noting that financial professionals attempt to employ logic and facts in their decision-making, as they are trained to rely on facts and numbers. Nevertheless, it is impossible to remove the human factor from the financial market activities. Therefore, the influence of the irrationalities is crucial and inevitable, which has been supported by evidence from the primary research.

Behavioural finance suggests that the markets behave in an irrational way, while rational finance claims that the market changes can be calculated and predicted. Though both theories are well-grounded and supported, this research claims that the knowledge of behavioural finance and market irrationalities provides more assistance to the financial professionals in the process of learning the market and understanding its changes. As the findings clearly propose that the market players are very prone to behavioural bias, social influence, and environmental stress, market behaviour is more irrational than rational. The valuable discovery related to the H3 is that individuals usually do not admit to have a bias or face irrationality. The factors are internalised and unchangeable.

Therefore, taking the approach to accept the irrational phenomena as an important contribution to the field is crucial for developing a comprehensive approach to studying finance. Conclusively, behavioural finance accommodates market irrationalities; it is more effective in understanding the market activities and changes than rational finance, which is based on logic. Thus, H3 has been proven.

Concluding Remarks

The findings derived from the common features of the participants present the appropriateness to conclude that the market players and financial workers exemplify the regular human behaviours. They are prone to biases, mistakes, and generalisations. Therefore, the markets also behave according to the people who are behind the gears of the market activities. The biases are transferred to the decision making, which in turn creates changes in the market activities. The combined effort of the numerous financial professionals and their common tendency to adopt behavioural biases create the financial markets.

Therefore, it is possible to conclude that the field of finance cannot be detached from the human factor and behavioural characteristics completely. The human factors have been explored and analysed with the further attempt to make sense of the findings. The three hypotheses have been driving the findings chapter to keep the research condensed and relevant. At the same time, the exploratory approach to studying the phenomena allowed realising additional aspects that are not related to the purposes of this project. They will be mentioned in the last chapter, as well as the limitations and advantages of the findings.

Chapter 5 – Conclusions

Value of the Findings

The nature of behavioural finance is a complicated and extensive field of knowledge and hence the research. The capstone project ventured into the introductory area of behavioural finance as a promising field of study that has the potential to contribute to the existing pool of financial knowledge that bases on logic and rationality. The findings of the research have proven that behavioural finance is a prospective approach that helps to understand the changes, adaptations, and activities of the market. The hypotheses of the research have been assessed and compared against the interview findings to ensure the sufficient and effective representation of outcomes. The conclusions derived from the interviews are the following.

  1. Firstly, the research proves that the three studied behavioural irrationalities (extrapolation of the past decisions, risk aversion, and the role of expectations) help the financial professionals make the decisions in the time of uncertainty and restrained environmental conditions.
  2. Secondly, the research redefined one of the hypotheses and concluded that financial experts rely on group, institution, or expert advice in the establishment of the career and in times of doubt.
  3. Thirdly, the outcomes of interviews claim that behavioural finance accommodates market irrationalities; it is more effective in understanding the market activities and changes than rational finance, which is based on logic.

The research has achieved the stated objectives; although, some adaptation of the hypothesis has been required. Moreover, the primary data collection discovered other interesting ideas for further research in the behavioural finance field.

The findings contribute to the existing field of research into behavioural finance. The conclusions suggest that the field is an effective approach to understanding the market behaviour that is mostly motivated by the people involved in it. As behavioural finance is a relatively new emerging field, the introductory exploratory research as this one is the appropriate strategy. Moreover, the exploratory nature of the data collection allowed discovering potential ideas for further research in behavioural finance, the psychology of finance, and social behaviour in business. The findings prove once again that behavioural finance is not only a valid effective field of study but also more effective in understanding and assessing the market changes than the rational theory of the financial market. Behavioural finance theorists suggest that the efficient market hypothesis does not work in the regular market conditions due to many constraints. The research has proven that market limits call for the development of the irrationalities that assist in making the decisions.

The findings are consistent with the hypotheses of various researchers in the field of finance. For instance, Shiller (2003) published condensed analyses of behavioural finance and its benefits in the investment market. In particular, the author claimed that irrational aspects of decision making, when factored in investment data, increase the likelihood of yielding profits. The findings of this research contribute to Shiller’s conclusion by assuring that behavioural finance is more effective than rational finance in making sense of the markets. Additionally, the research agrees with the statement of Bloomfield (2010) and Mitroi and Oproiu (2014) that behavioural finance can contribute to the rational theories of the market in order to increase the predictive power of the theory.

The H3 of this capstone project proves that behavioural finance is better than traditional finance in understanding the markets. At the same time, the findings are not suggestive of excluding the rational theory of finance from the picture completely. In fact, for the complete comparison, both approaches to market learning have to be present. Therefore, the study agrees with the two researches in the claim that the combination of rational theory and behavioural finance has the strongest predictive power and potential to yield measurable results in the financial markets.

The conclusive remarks are the following. The purpose of this study can be condensed into the statement that the field created, managed and operated by people cannot be perceived as completely void of human behaviour. Finance is the human-managed field that regularly employs different decision-making processes, data analysis, and informed conclusions. The psychology inevitably influences the industry in many different aspects, which has been proven in the course of capstone project writing. In order to comprehend financial markets and increase the predictability power in the money-related activities, the professionals should internalise the assumption that the expectations of financial gains are stimulated by the desire rather than rational data.

The learning of behavioural irrationalities, human expectations, and experience mistakes, the market becomes easier to predict, while the failures occur to be less stressful. The human subjects involved in the field of finance typically adopt quasi-rational behaviours. Their activities are not only emotion-motivated and irrationality-based. Instead, they allow internalised biases and cognitive shortcuts to influence their logic and rationality. Thus, the purpose of this research is to prove by evidence that failures are inevitable, and human error is the way to learn and become better. The understanding of the psychology of the markets can explain the abnormalities happening in the financial field from time to time and prepare for the unexpected occurrences.

Relevance and Limitations

Significance of the Study

The significance of the study has three major sections. Firstly, it contributes to the knowledge pool of finance as a field of social science. As explained in Chapter 1, behavioural finance is a relatively new area of interest in research and education. In two decades, the researchers in the field have contributed to the explanation of the different behavioural phenomena and financial irrationalities that shape the study of behavioural finance. However, this research takes the exploratory approach not only to correlate to the existing database, but also to find new interesting areas of further exploration. Therefore, the value of the given data collection and analysis process is in confirming the existing theories and finding additional information to explore in further studies. The exploratory nature of the research presents an opportunity to negotiate new research designs and hypotheses testing in order to develop the field of behavioural finance.

Secondly, the research presents interesting suggestions for learning finance as a career and approaching the industry. The rational model of finance has been dominating the education institutions and practise venues (Fox, 2009). Nevertheless, the markets are not completely rational and logical, as discussed in Chapter 1 and Chapter 2. The findings correspond to the assumptions and help validate the claim that behavioural finance should be of great significance both in financial education and in rational finance. The modification in the educational paradigm can decrease the stress incurred in future careers in the financial field. Moreover, the new employees and aspired managers can be prepared to approach the market changes with the resilience to the risk-intensive situations. Thus, this research further supports the importance of learning behavioural finance in the course of preparing to become a practical finance employee.

Thirdly, the capstone project adds to the two-decade attempt to validate the behavioural approach to managing finance. The findings suggest that irrationalities and biases are helpful strategies in uncertain and stressful situations that require fast and efficient decision-making. The research particularly concentrated on the three behavioural irrationalities. It is proven that they not only exist in the financial industry but also help to make decisions in the time of uncertainty and suggest information sharing and faster learning. The interviews suggested that every professional is prone to behavioural bias and decision-making shortcuts, which also proves that behavioural finance is inevitable in the industry.

Research Limitations

The objectivity of the research data collection and analysis is the crucial factor in evaluating its worth for the scholar community. Qualitative research provides data that cannot be quantified because it includes behaviours and perceptions (Anderson, 2010). The research project aimed at collecting qualitative data, which addressed the hypotheses. The limitations of the research are related to its nature and cannot be completely removed. However, the researcher attempted to decrease their influence on the validity and reliability of results. The first limitation is the small sample of interviews that results in decreased representability. The limitation is unavoidable due to the time and resource constraint for data collection. The sample is sufficient for the purposes of an exploratory study that aims to find trends and address hypotheses. Moreover, the researcher reported the findings only in case they were repeated by at least 5 participants, hence increasing representability and reliability.

The second limitation is inherent in qualitative research design, which is bias in the interpretation of data. Anderson (2010) suggested giving the titles to the data assessed and taking breaks with interpretations. The researcher transcribed and analysed each interview separately to decrease the possible bias and then searched for trends to combine the findings into reasonable conclusions. Thus, the research addressed the possible limitations to its potential through consultations with scholarly articles and following their advice. The third limitation that cannot be controlled by the researcher is low generalisability of the qualitative research findings. The nature of qualitative research does not allow the results to be transferred to a different population (Anderson, 2010). However, the limitation does not pose a significant threat to the validity of the reported findings, as the aim was to explore the field and prove its importance in the modern world. The research has proven the hypotheses and discovered numerous interesting ideas for further research.

Suggestions for Further Research

The analysis of findings opened a great variety of opportunities for further research in the field of behavioural finance. As the purpose of this research project was not address only three hypotheses aimed at validating the field of behavioural finance and findings its benefits, some of the interview paths were left unattended. They have presented a list of research ideas.

  1. Firstly, the degree of rationality in the financial markets stays open to discussion. This research established that bias is an inevitable part of behaviour and decision-making in the financial markets. Moreover, it collected secondary data that suggest that both logic and irrationality build the best approach to managing the markets. Thus, the qualitative research into the degree of market rationality and irrationality would be a valuable contribution to the industry.
  2. Secondly, the interviewees perpetually mentioned the decision-making shortcuts in financial management. Some ideas have been reported in the findings sections, but most responses did not connect to the purposes of the capstone project. It would be advisable to venture into the collection of decision-making shortcut ideas through qualitative research that helps financial managers to cope with the challenges on the job.
  3. Thirdly, the assessment of the expertise sharing and training of the new employees in the financial industry poses an interesting objective for further exploration through qualitative research design. The comparison between rational finance theories application and behavioural personal suggestions would create an innovative approach to educating the newcomers in the field.

The validity of the current findings can be increased through designing quantitative hypotheses testing among the bigger population of participants. For example, the questionnaire with the Likert-scale testing of the frequency of employing behavioural shortcuts and biases can be utilised for the big population of financial managers. The design would test the frequency and efficiency of behavioural finance. Moreover, it would increase the generalisability of the outcomes through effective segmentation of the population and representative sampling. The other method of contributing to this capstone project through the quantitative studies is to perform the test of rational finance elements and behavioural factors in the career. The study would employ the professionals in the field, who have long experience in the job and can surely share their career advice. The questionnaire distributed to the larger population increases the validity and generalisability of findings.

Moreover, the statistical testing of the likelihood of one or another aspect occurring in the financial career can increase the reliability of the findings in the project. The possibilities in the behavioural finance research are numerous, which include observations, qualitative exploratory researchers and quantitative hypotheses testing. The field of behavioural finance is a relatively new research arena, which has complete validity to be studied, researched, and applied in real life. The research conclusions present a guarantee that behavioural finance increases its influence in hand-on careers in the market management fields of employment.

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