1) How does emotional finance differ from behavioral finance? Answer in eloquent, bulleted
form, and sequential order, if possible. State the conclusion in the end.
The difference between Emotional Finance and Behavioral Finance are the
following:
Emotional Finance
Emotional Finance explains that people are inherently irrational and
largely driven by their emotions, both those of which they are consciously
aware and, more importantly, those which are unconscious;
It provides a very practical framework that can help explain and predict
those aspects of investment decision making and market activity not open
to rational models and conventional perspectives; and,
It recognizes how markets constitute large virtual groups with behavior
reflecting the interaction of the often unconscious drives, needs, emotions
and desires of their participants as they try and deal with the inherent
uncertainty of the investment process and associated anxiety.
Behavioral Finance
Behavioral Finance can be explained as modern finance in which it seeks
the reasons of stock market anomalies by justifying them with explanation
of various biases that the investor has while taking investment decisions;
It provides theoretical concepts in the practical world. Since there are
certain changes and unusualness in the market because of the effect of the
psychology of different users, the study of Behavioral Finance provides
various tailor-made solutions to the investors to be applied in their
financial planning; and,
It recognizes why individuals do not always make decisions they are
expected to make and why markets do not reliably behave as they are
expected to behave.
Conclusion:
Emotional finance is a new paradigm in the understanding of investment activity
and prediction of asset prices and market behavior. It differs both from traditional finance
theory which is based on the idea investors are “rational”, and behavioral finance which
form, and sequential order, if possible. State the conclusion in the end.
The difference between Emotional Finance and Behavioral Finance are the
following:
Emotional Finance
Emotional Finance explains that people are inherently irrational and
largely driven by their emotions, both those of which they are consciously
aware and, more importantly, those which are unconscious;
It provides a very practical framework that can help explain and predict
those aspects of investment decision making and market activity not open
to rational models and conventional perspectives; and,
It recognizes how markets constitute large virtual groups with behavior
reflecting the interaction of the often unconscious drives, needs, emotions
and desires of their participants as they try and deal with the inherent
uncertainty of the investment process and associated anxiety.
Behavioral Finance
Behavioral Finance can be explained as modern finance in which it seeks
the reasons of stock market anomalies by justifying them with explanation
of various biases that the investor has while taking investment decisions;
It provides theoretical concepts in the practical world. Since there are
certain changes and unusualness in the market because of the effect of the
psychology of different users, the study of Behavioral Finance provides
various tailor-made solutions to the investors to be applied in their
financial planning; and,
It recognizes why individuals do not always make decisions they are
expected to make and why markets do not reliably behave as they are
expected to behave.
Conclusion:
Emotional finance is a new paradigm in the understanding of investment activity
and prediction of asset prices and market behavior. It differs both from traditional finance
theory which is based on the idea investors are “rational”, and behavioral finance which
