Traditional Leadership

Traditional Leadership And E-Leadership A Study of Organizational Effectiveness In Today’s Scenario. CONTENTS TOPIC PAGE NO. 1). INTRODUCTION 3-7 2). NEED FOR THE STUDY 8 3). OBJECTIVE OF THE STUDY 9 4). SCOPE OF THE STUDY 10-11 ). RESEARCH METHODOLOGY 12 6). LITERATURE REVIEW 13 7). EXPECTED CONTRIBUTION OF 14 THE RESEARCH WORK INTRODUCTION It has been accepted as a truism that good leadership is essential to every concern whether its business government or countless groups of organizations. Leadership shapes the world we work, play and live. If Leadership is such a crucial factor then, the critical issue is: What makes a great leader? It’s tempting to answer: Great followers! Although there lies some truth in this response the issue is much more complex. Leadership has been described as the â€Å"process of social influence in which one person can enlist the aid and support of others in the accomplishment of a common task†. A definition more inclusive of followers comes from Alan Keith of Genentech who said â€Å"Leadership is ultimately about creating a way for people to contribute to making something extraordinary happen. The source of such influence can be formal, such as one provided by the possession of managerial ranks in organizations. But not all the leaders are managers and the vice-versa also holds equally true. Non-sanctioned leadership-that is, the ability to influence that arises outside the formal organization- is as important as or more important than formal influence. In other words, leader s can emerge from within a group or can be formally appointed. It comes clearly that leadership is a process of influencing others towards achievement of a goal. It is this influence part that makes this concept so crucial. As a practice, leadership is as old as mankind or even more, but as a concept of study it is of a recent origin. In the past few years numerous literatures has been developed to lay emphasis on the topic. Numerous studies have been done and theories have been developed. All these theories have one thing in common, and that is the influencing others factor. Over the year’s world has never remained stagnant and same is the case with leadership also. With time new concepts and paradigms have been added while the old ones generally remains after accommodating certain new phenomenon. Since the time the concept has been formally studied, numerous theories have been developed to explain its dynamics. Some of the well read and accepted theories of leadership are the Trait theories, Behavioral theories (Ohio State Studies, University of Michigan Studies and The Managerial Grid) and Contingency Theories. The above said three theories are considered as the traditional theories of leadership . It is with these studies that leadership has achieved its present status of a formal topic of study, if not a separate discipline. The latest paradigm in the study of leadership is the concept of E-Leadership. The concept has emerged as an answer to the question of bringing together, the skills and talents across national, geographic, cultural and other boundaries, using communications technologies tools to achieve results. E-Leadership stands for balancing many roles and carrying them out via communications technologies. E-leadership has emerged as solutions to the issues emerging at the back drop of the development of virtual organizations and global village. Organizations today are found using the concept of E-leadership in order to integrate their human and material resources, which may lie across national boundaries, to achieve organizational goals and to increase their organizational worth. Under such organizational structure, where it is not possible to arrange frequent meetings or any such face to face interactions between personnel, and the orders and permissions has to travel thousands of miles within seconds, E-leadership can be the solution to such critical issues. E-leadership is a term used when a leader must preside over a geographically dispersed or virtual team. Not being physically close to your subordinates poses many problems for a leader. An e-leader thus must be particularly effective at team building and communication in non-traditional modes. Since face-to-face communication is absent, e-leaders must encourage frequent communication and use multiple modes of communication where appropriate. In order to facilitate group cohesion, it may behoove the leader to gather the team together initially to have a face-to-face meeting so team members can get to know each other personally. If this is not possible, frequent group discussions should be directed by the leader online to ensure communication between group members. E-leaders must also impose structure and routine on the group by setting goals for team members and tracking their progress. This will help team members make sure they are making progress and will help them feel like they are a valuable part of the team. Proponents of E-leadership are promoting the concept in order to increase the organizational worth and in the process the concepts of traditional theories of leaderships are been found undermined. Although e-leadership has its drawbacks, it also has some advantages and in some cases is simply required. Below are some of its advantages: †¢ It allows for the fastest responses and best ways to keep up with the competition (e. g. , benchmarking). †¢ It allows for employees to work at home (i. e. , telework), which in some studies has been shown to reduce work-family conflict. †¢ This allows for complementarities of skills – that is, a leader can create a really effective team by choosing the best candidates from a wide variety of locations. Since team members come from many different places, they may be able to provide unique perspectives, enhancing the team’s creativity and innovation, which may lead to an increase in productivity Through case studies of organizations, this research paper is an attempt to bring out the contribution of traditional theories in the determining organizational effectiveness and the contribution of E-leadership in the same. Through this research work it would be seen as to how E-leadership would assure true motivation of group members in a virtual organization when members are physically not visible to one another. NEED FOR THE STUDY The changing requirements of organizations in the context of cross border, cross culture functioning which calls for higher leadership effectiveness is the first and foremost need for doing research on this field. Also the increasing literary emphasis on changes in addition to the existing patterns of traditional leadership styles also arises the need to study this phenomenon. The new evolving concept of E-leadership is also redefining the traditional practices of leadership in today’s context in various organizations. OBJECTIVE OF THE STUDY 1. Research would aim to provide a new insight into the practice of leadership, its basic concepts, theories, and advantages leadership. 2. The research would aim to analyze the importance of leadership in the current business scenario. 3. Through certain organizational case studies, the research would bring out clearly the changing trend in styles of leadership being adopted in the organization. 4. To make a detailed comparison between traditional leadership and E-leadership styles in the context of current business environment and to indicate as to how they are complementary to each other. SCOPE OF THE STUDY The practice of leadership is found to be ages old. Over the period of time as the requirements changed, new styles and practices came in use to aid the old ones. Sometimes such new practices comes as an addition to the existing patterns while sometimes they come as a replacement of the old and redundant styles. E-leadership is a new and upcoming concept in the field of leadership studies and practices, which is an addition to the existing styles. Though much has been talked about the concept, there is still scope for studies left. There is a lack of scholarly writings and research in the sense that how organizations can aid their leadership styles with that of E-leadership practices in order to make it much effective in today’s context. There exists volumes of management literature dealing with the topic of leadership but only a partial fraction of it is found dealing with E-leadership. This makes the scope of study wider. There exists wide opportunity for research work in the field so that the concept is introduced in regular management literature. Owing to the changing dynamics of business and other concerns, E-leadership is the pattern of the future. In times to come it would be the buzz for organizational effectiveness. Thus research-backed studies are essential for the topic to get its due importance. Such scholarly works would help introduce the topic in regular management studies. Such requirements make the scope of study amply wide. The study would cover the traditional leadership styles, its origin, features, its usage, and advantages. My research would also show how each of the traditional theory emerged as an answer to the shortcomings of the earlier ones thus making a chain. It would then study the recent practice of E-leadership, its origin, and usage and benefits. After analyzing the two, my research would aim to indicate as to how E-leadership is a practice for enhancing the leadership effectiveness and not a concept that aims to replace the studies of traditional leadership. This would be done through case studies of numerous organizations. Such scope makes the scope amply wide for an in-depth research work. LITERATURE REVIEW Owing to the wide scope of my study I aim to undergo wide survey of literature. My literary survey would include all the management literature dealing in the topic of leadership. Various journals, articles, magazines and other available research works of similar nature and scope would aid the study. Internet and the articles available on various websites would act as indispensable tool for the purpose. I aim to undertake personal interview of certain managers in organizations who are in into the application of E-leadership practices. This would enable me to take the first hand experience of those who are using the concept. The responses of the respondents would act as a primary data. Reports of various organizations on its work culture and recent trends and practices would also be referred. This would help in determining the changing work culture in organization. Other articles related to the matter, if any, which would be needed in the course of study, would also be referred to. For the purpose libraries of certain institutes and universities would be relied upon. RESEARCH METHODOLOGY Having defined the need for the study and setting out research objectives it is necessary to make a research design. Research design specifies the method and procedures for collection of requisite analysis to arrive at certain meaningful conclusion at the end of the proposed study. In the initial stages up to the final designing of the research work, I intend to use both descriptive as well as exploratory research designs It will include detailed study of related literatures and in-depth interviews with managers of some of the organizations. In the later stage of the research work I intend to use Conclusive Research Design. For this descriptive methodology will be used by me. All this will help to find a definite solution for the research problem and for drawing specific conclusion regarding the problem under study. SAMPLE DATA In this research I intend to keep the sample data as 200, which will include entrepreneurs and managers of few organizations as well as employees, so as to be able to have a better understanding of the changing scenario of leadership styles in today’s organization. EXPECTED CONTRIBUTION OF THE RESEARCH WORK . Will be able to understand the concept of leadership and its various theories. 2. Will be able to have a better insight about the traditional leadership being used in various organizations. 3. Understand the evolving concept of E-leadership and its application in the organizations. 1. Will be able to do a detailed comparative study of the two kinds of leaderships and their impact on th e organizations in the current market scenario. 2. Will be able to recommend to the organization the various advantage and disadvantages of adapting a particular kind of leadership.

Anu Ano Ang Dapat Tandaan Sa Pag Aalaga Ng Hayop

I have watched so many films before that deals with children that makes me cry because of its sad endings. But this movie really touched and even tore my heart specially now that I’m already a mother. At first, when I see the child on the screen with that attitude I thought that it was just a part of being a kid who does silly things and sometimes gets so stubborn. Until I found out that there is something wrong with the kid that most of the parents don’t understand and what their child is going through?It is true that it was really hard for us parents to admit that our child is different from the others and most of the time we compare them with our other kid and we sometimes say â€Å" Why are you like that? Why can’t you do what your sister/brother’s did? †. Most of us parents don’t realized that â€Å"Every child is a Special† and they are unique as a fingerprints. We’re not suppose to compare them with the other, not to esti mate them on what they can do or even pushed them on the things that they don’t want.Let us be their companion, their security and comfort. Study our kids and help them grow with LOVE, CARE and full support. If our child seems to be different, let us redirect them and help them to live like the others. As a teacher, we also need to be sensitive on the needs of our students. Kids always looked up and believed on us in the way we act, say and do. We as a second parents for these children can be a friend too! Let us help them to share and show their talents.Parents and teachers may work together for the better future of each child. I thank you so much Ma’am Ruby for sharing us that wonderful movie. You’re not just a Prof. that gives us knowledge for the given subject but you’re contributing to us much that will help us not to be perfect parent or teacher but how value our life to the fullest to be a good person with LOVE! Truly, God is good and He really mad e us with a purpose.

Balinese Trance Performances Essay Example | Topics and Well Written Essays - 1250 words

Balinese Trance Performances - Essay Example But in the view of the vast majority of other traditions, speech, as the mode of communication of ordinary reality, is singularly unsuited for this purpose. It is but a hardly audible knock on the very thick wall separating humans from the spirit realm. In fact, humans have to make a truly heroic effort to be noticed on the other side. Merely talking, falling into a worshipful mood, feeling "transcendent," "numinous, or "oceanic," or whatever other pompous words are listed in the dictionary, simply will not do. Instead humans, if they have the urgent necessity or desire to squeeze through the chinks in the wall, need to change the very functioning of their bodies in the most radical way. The term summarizing these changes is religious trance, one of a large group of altered state of consciousness of which humans are capable. It is termed religious because observation shows that it is the one occurring in religious context, that is, when contact is made with the alternate, the sacred, reality." (9) Trance when used in the context of highly spiritual, religious and exotic forms of dance or dance drama like Balinese Trance Performance relates t... igious and exotic forms of dance or dance drama like Balinese Trance Performance relates to a scenario where the performer gets into an altered state of thinking where he/she engages with his/her environment in a highly imaginative and structurally organized engagement. This is the result of sustained involvement of the performer with the performance and the character of the performance whereby there is an easy movement between the performer and the character in terms of personality and mental disposition. Richard Schechner mentions in his work that even naturalistic actors affirm that something happens to them psychologically and physiologically during a performance. A two way process unfolds simultaneously. The first is the one shaped by author and director, the play and the mise-en-scene. But just as important is the more evanescent process of the performer. The play and mise-en-scene have a quality of having-been-lived, while the performance has the quality of living now. The play will be completed only if the performers are able to carry through the process they start afresh each night. That process cannot be rehearsed. (46) It is said about Balinese Trance performance that once the performer gets into the shoes of the character, there is total absorption of the personality of the character in terms of body movements, facial expressions and speech. It is as if there is a generation of extraordinary amount of energy in the body of the performer in the form of an outside being entering the body and the soul in the form of an Angel, Demon or other higher Spirits and Deities. Jane Belo in his work Trance in Bali, elucidates in the context of Balinese trance performances that if human beings went into states of trance, they were believed to be entered by

Leadership Reflection Essay Example | Topics and Well Written Essays - 1000 words

Leadership Reflection - Essay Example leader is the transformational leadership in which I try to set down such standards that those following me find easy to follow by their own willingness. Other domains in which I see myself as a leader are intrapersonal leadership because I tend to lead my own self in a very effective way; and, interpersonal leadership because I believe that I conduct effective relationship management with my stakeholders through effectual conflict management based on active communication and collaboration. I keep everyone on the platform happy and satisfied and keep them motivated through personal attention and rewards. These were some domains in which I see myself as a good and ethical leader. 2. I take care of the employees so as to preserve a vigorous environment within the organization. I verify that the salaries are being paid in time; try to pursue a system of rewards and bonuses; and, listen to the employees’ troubles and try to remove them. This keeps them working at high competence. I make agreements with business partners while respecting their decisions. This confidence between the partners makes the organization grow and maintains its integrity. I know how to schedule my projects keeping in mind the time frame and instruct the team to manage work schedule accordingly. I know that I have to abide by the rules and regulations I have agreed upon while signing a contract and will never back off. All this adds to the progress of my organization. Strengths that I wish to develop include vision and framing my actions according to ethics. I want to develop a brawny vision so that I am able to solve problems with ethical values. I want to be able to frame my acti ons in such a way that they go just in accordance to my inner beliefs and standards because according to Freeman and Stewart (2006), leadership is â€Å"a fully ethical task†. 3. When I look at my past, I come across many events that have changed my inner self to the kind of person I am today. My leadership skills

Human Resources and Performance Management via Reward Systems Essay

Human Resources and Performance Management via Reward Systems - Essay Example The paper tells that in a business environment that has become increasingly globalized with a wide array of customer services demands and fierce competition between markets, organization performance and productivity has become the central focus of many organizations. Thus the objectives of the modern business organization are inevitably to improve performance with a view to remaining and or becoming competitive. In order to remain or become competitive, organizations are persistently seeking ways to enhance performance. This report intends to demonstrate how performance management via a rewards system can enhance organizational performance. It is first necessary to establish how a performance management can be structured so as to include a rewards system. Thus three of the main components of performance management systems will be evaluated. Ideally, a performance management system begins with performance planning, and branches off into performance appraisal/reviewing followed by feed back/counseling and performance facilitation which is in turn followed by rewarding, performance improvement plans, and potential appraisal. Together these components of performance management systems signify an organization driven by high performance systems if managed effectively and efficiently. Thus activities, practices and policies of any performance management system must be comprised of each of these components. ... Three major components of performance management systems will be evaluated. This will be followed by an evaluation of the link between motivation and performance management. The final part of this report sets out a description and evaluation of a total rewards system linked to performance management. Performance Management Systems In a business environment that has become increasingly globalized with a wide array of customer services demands and fierce competition between markets, organization performance and productivity has become the central focus of many organizations (Becker & Gerhart, 1996). Thus the objectives of the modern business organization are inevitably to improve performance with a view to remaining and or becoming competitive. In order to remain or become competitive, organizations are persistently seeking ways to enhance performance (Becker & Gerhart, 1996). This report intends to demonstrate how performance management via a rewards system can enhance organizational performance. It is first necessary to establish how a performance management can be structured so as to include a rewards system. Thus three of the main components of performance management systems will be evaluated. Ideally, a performance management system begins with performance planning, and branches off into performance appraisal/reviewing followed by feedback/counseling and performance facilitation which is in turn followed by rewarding, performance improvement plans, and potential appraisal (Armstrong, 2005). Together these components of performance management systems signify an organization driven by high performance systems if managed

Research Article Example | Topics and Well Written Essays - 500 words - 1

Research - Article Example ew in the article, Health behaviors and health status of at-risk Latino students with diabetes by Hurtado-Ortiz, Santos, & Reynosa (2011) depicts a logical organization. Firstly, the literature review defines diabetes among Latinos and the prevalence of diabetes among young Latino adults. Then it discusses various studies that relate diabetes and college students in a systematic manner. The literature review then addresses diabetes and Latino college students. Finally, it discusses acculturation and diabetes and establishes literature gaps that help in exploring the research question. The literature review in the article, Effects of workplace incivility and empowerment on newly graduated nurses organizational commitment by Smith, Andrusyszyn, & Laschinger (2010) has a better logical organization. The literature review starts with exploring the related research on the research topic with the aim of supporting the applied theory and establishing a relationship between empowerment and organizational commitment. Then it discusses the correlation between psychological empowerment and positive organizational results in nursing. The literature review then defines workplace incivility and its supporting models. Finally, the literature review defines organizational commitment among new graduates. The adopted organization provides a strategic manner of answering the research question. Clearly, the literature review in the article, Effects of workplace incivility and empowerment on newly graduated nurses organizational commitment by Smith, Andrusyszyn, & Laschinger (2010) has a better logical organization than the literature review in the article, Health behaviors and health status of at-risk Latino students with diabetes by Hurtado-Ortiz, Santos, & Reynosa (2011). The literature review by Smith, Andrusyszyn, & Laschinger (2010) follows a concise and clear strategy in discussing the research question. It is thus easy to follow the organization of the literature review in

Discuss the four core strategies that underpin the modern concept of Essay

Discuss the four core strategies that underpin the modern concept of Risk Management and Control. Relate these core strategies to practical security - Essay Example xecuted in a variety of ways, which comprises of strategies including the transfer of the risk toward another party, avoiding any such risks beforehand, reduction of the after-effects and consequences of the risk once it hits the organization or in another case, accepting the consequences posed by a risk. Also, the nature of risk management depends on the kind of risk posed on an organization, i.e. in case of a physical risk; the risk management would involve analysis of potent risks on property of the organization, while financial threats may be resolved by considering insurance options etc. Also, the threats may be initiated from many different sources, for instance, there may be environmental, technological, and political or in some cases even organizational threats involved, which the manager may have to deal with. Prior to the execution of the risk management, assessment of the risk is quite crucial. This involves the analysis over the extent of the severity of any kind of potential loss which may occur or the chanced of the occurrence of the loss. The manager must measure the value via various indicators he/she might come up with during the analysis. However, if the statistical data is available for the cause, this would be an ideal situation, as the risk assessment in this case would be the most accurate one. Risk assessment, here, implies that the manager undertakes the holistic view of the organization, considering the resources, internal and external environment, along with the market conditions and any other factors which must be taken into account to make a prediction on what kind of threats may affect the organization. Based on this analysis, the manager clearly identifying the nature and the extent, also the probability if the threats which the organization may have to face in the fu ture. Once the analysis is conducted, the manager can then consider the options and then take considerable time to choose the most desirable options to avoid any kind of

Food Safety Bulletin Essay Example | Topics and Well Written Essays - 500 words

Food Safety Bulletin - Essay Example Their children will get ill and in return they not only have to spend extra cost on medical but the mental pressure they have to go through is much worse. So it is necessary to educate the people regarding the health issues, food etc but most of our society is ill-literate. It is mostly believed that the food is not harmful but things like raw meat, poultry, fish , eggs contains bacteria which are harmful so in such a case media is of great importance. Television, radio can be used to target market. In places where people have no such knowledge electronic media will be able to give them knowledge about the safety precautions which should be adopted. It is not necessary that only the raw food contains bacteria it can be contaminated at the time of purchase too. So mishandling is one of the greatest errors which are responsible for food-borne illness. Food safety centers should be established which should guide the public regarding the raw meat. At what temperature it should be kept in the freezer and for how long it will survive? Meat should not be left opened because bacteria tend to multiply very soon it should be rinsed as soon as possible and should be kept at the required temperature.

Sound Pollution Essay Example for Free

Sound Pollution Essay It focuses not on the cliched environmental problems such as Global warming, but on an issue that is quite exceptional in nature- Noise Pollution. Its name quite clearly outlines its aim and purpose of existence*- ‘Awaaz’ is a Hindi word that means- Voice. Sometimes, in everyday language, it is also used in reference to noise. Voice, noise. Perfect. Its aim is to counter noise pollution. It may sound weird, but noise pollution is one of the most prominent environmental pollutants in India. It is quite exclusive to the metropolitan cities in India-Delhi, Mumbai, Calcutta, Chennai, Bengaluru etc. Literally: Noise pollution is encountered almost every day in such places, whereas in the rural areas, it occurs periodically- noise pollution peaks during festivals- the beating of drums, trumpets, loud speakers, fire crackers, bombs etc add to the high-decibel noise made by the people during the harvest festivals and other religious festivities. In the cities and other urban sites, we can note that noise pollution is higher than usual during election times- the politicians about a hundred from each political party, which itself count up to seven hundred fifty from all over the nation, use loudspeakers that cross the maximum noise limit approved by the Supreme Court of India. The maximum decibel limit ranges between 125 and 145 db (db- Decibel; unit to measure the noise level) Especially during Diwali- a famous festival of light celebrated all over India by Hindus- involves bursting of firecrackers and bombs. These explosions and lights are mainly incorporated into these festivals to express joy and festivity. However, when a test to check the noise pollution caused by the firecrackers, was performed by the Maharashtra Pollution Control Board (MPCB) and Awaaz Foundation before Diwali, it was found that at least 8 crackers crossed the decibel limits by considerable amount. Following many such incidents, the Awaaz Foundation has been quite active in spreading awareness of the ill effects of noise pollution by helping to shape up the government policies on the same. It has also organized two seminars: The first on the pollutant – Loudspeaker on October 2004 and the next concentrates on noise pollution caused by traffic and construction sites- the latter was conducted on February 2006. To talk about the actual effect that Awaaz has managed to create in the lives of the Mumbai citizens a) Several strategies and policies suggested by the Awaaz Foundation were accepted the Government of Mumbai and were implemented such as: Incorporation of noise parameters in the construction sites of the Mumbai- Nhava Trans Harbor Sea Link. Also it has agreed to be a Silence Zone after completion of the construction. Silence zone: region around a noise-producing source in which the noise is not audible. b) Under the foundations influence, a ‘No Horn’ day has also come into practice. c) Noise Barriers have been introduced in the roads of Mumbai. d) Under its efforts, many other places have been declared Silence Zones. e) Monitoring of sound levels, especially during festivals and Political rallies have led to considerable decrease in noise pollution in Mumbai.Other activities undertaken by this foundation to gradually improve the environment of Mumbai are: Banning of Sand Mining in several Beaches, organizing a Workshop that discusses alternative methods on building and construction that do not use sand and participation in the Mumbai Tree Association are also its other initiatives. However these are not that prominent compared to their role in preventing Noise Pollution. Reference http://www.indianexpress.com/news/decible-levels/703669/

The Meaning of Life -Opinion Essay Example for Free

The Meaning of Life -Opinion Essay My beliefs on the meaning of life in religion and interpretation of such things. In approaching the question of the meaning of life we have to examine the nature of meaning itself. Meaning, is by definition the point, or the intended goal. Consider the point of humans and the universe as seen from monotheistic religion. If life and the universe is some sort of toy or form of entertainment for some greater being, his point, his own entertainment, would then be the meaning of humans and the universe. Consider the goals of the deities of various cultures. Some strive for a balance between the forces of good and evil. This balance seems to simply be a choice of the deity, the way he thinks it ought to be. The concept of a greater being as a source of the meaning of life is flawed, because in talking about an actual point to absolutely everything, we are simply considering the goals of a being more powerful than ourselves who has chosen one of many possible goals that humans can conceive. This is to say that, if a god like this exists, his goal for life and the universe is not necessarily valid as a meaning of life, the universe, and himself. For instance, the Bible claims that the Christian deity created the universe and placed humans in it that they might be in awe of his power. If this is so, why is worship the correct response? The meaning of the universe as created by God is the entertainment of God, but what is the meaning of the larger system containing God and his creations? We could conceive of an even greater being, but that simply takes us all the way back into the wall of infinite regression. When I first read the Bible, it struck me as neutral on the idea of worship. The Bible flat out tells you that God created humans so that they would be in awe of him, which amounts to saying God created us to inflate his ego. We are to God as our pets are to ourselves, sources of unconditional love. In the book of Job, God essentially makes a gentlemans bet with Satan that Jobs worship is genuine and not inspired by Gods kindness. In other words, you throw a rock at my dog and Ill swing my arm so it looks I threw it, and well see if he still comes when I call him. In the end, Job is not simply the dog, because he questions Gods throwing of the rock. Gods response is consistent with his goal of inspiring awe. Even though the idea of a bet with Satan is well within Jobs grasp, God claims that his purpose was inconceivable to Job. God is simply fortifying the concept that is critical to the continuance of human worship: that with inconceivable power comes incredible intelligence and unknowable purpose. The narrator of the Bible, which is supposedly God himself, speaking through humans, never directly says that he should be worshipped. This is merely the interpretation of humans, who may be created in Gods image with one crucial difference, the need to worship. Perhaps then, God is after the meaning of life. Imagine a being so powerful as to be able to create and mold the universe, who, like Roman and Greek gods, is only marginally more intelligent than his creations. Perhaps God, in all his ridiculous power, cannot change himself. In order to find the meaning of his own existence he creates the human race so that we might evolve to an intelligence greater than his own, in much the same way that a computer programmer wishes to create true AI, an intelligence greater than human, which might evolve within a computer. We are given the title of pet and the instinct of worship while the creator waits for a companion in the search for meaning. Of course this is wrong, or I would have been struck by a lightning bolt during that last sentence and brought to Gods side. Or perhaps God is not aware of his own success yet, or perhaps I am not the first to uncover Gods purpose, and my predecessor is debating meaning with God as we speak. Or perhaps I am intended to continue to search from the perspective that has proved so useful. In any case, this may amount to Christianity being a giant misunderstanding. At the very least, it means I can walk up to a Christian, tell him I believe in God and everything in the Bible, and ask him what the candles and the cathedrals are for. Back again to the one and only point: if a meaning exists it is not necessarily the purpose of our creation or existence. It has a larger scope, and can refer to the meaning of the existence of the being or force creating us, if such a force exists. This whole essay may seem simply a chance to bash Christianity and give intelligence even more of a right to inspire ego. Yet is it not the egotistical nature that is present in celebrating the most God-like trait in man, his intelligence, more forgivable and less blinding than the egotististical nature of comparing the meaning of ourselves to the meaning of the universe?

Efficient Markets Hypothesis (EMH)

Efficient Markets Hypothesis (EMH) INTRODUCTION: Much of modern investment theory and practice is predicated on the Efficient Markets Hypothesis (EMH), the assumption that markets fully and instantaneously integrate all available information into market prices. Underlying this comprehensive idea is the assumption that the market participants are perfectly rational, and always act in self-interest, making optimal decisions. These assumptions have been challenged. It is difficult to tip over the Neo classical convention that has yielded such insights as portfolio optimization, the â€Å"Capital Asset Pricing Model†, the â€Å"Arbitrage Pricing Theory†, the â€Å"Cox Ingersoll-Ross theory† of the term structure of interest rates, and the â€Å"Black-S[choles/Merton option pricing model†, all of which are predicated on the EMH (Efficient Market Hypothesis) in one way or another. At few points the EMH criticizes the existing literature of behavioral finance, which shows the difference of opinion on psychology economics. The field of psychology has its roots in empirical observation, controlled experimentation, and clinical applications. According to psychology, behavior is the main entity of study, and only after controlled experimental dimensions do psychologists attempt to make inferences about the origins of such behavior. On the contrary, economists typically derive behavior axiomatically from simple principles such as expected utility maximization, making it easier for us to predict economic behavior that are routinely refuted empirically The biggest threats to Modern Portfolio theory is the theory of Behavioral Finance. It is an analysis of why investors make irrational decisions with respect to their money, normal distribution of expected returns generally appears to be invalid and also that the investors support upside risks rather than downside risks. The theory of Behavioral finance is opposite to the traditional theory of Finance which deals with human emotions, sentiments, conditions, biases on collective as well as individual basis. Behavior finance theory is helpful in explaining the past practices of investors and also to determine the future of investors. Behavioral finance is a concept of finance which deals with finances incorporating findings from psychology sociology. It is reviewed that behavioral finance is generally based on individual behavior or on the implication for financial market outcomes. There are many models explaining behavioral finance that explains investors behavior or market irregularities where the rational models fail to provide adequate information. We do not expect such a research to provide a method to make lots of money from the inefficient financial market very fast. Behavioral finance has basically emerged from the theories of psychology, sociology and anthropology the implications of these theories appear to be significant for the efficient market hypothesis, that is based on the positive notion that people behave rationally, maximize their utility and are able to prices observation, a number of anomalies (irregularities) have appeared, which in turn suggest that in the efficient market the principle of rational behavior is not always correct. So, the idea of analyzing other model of human behavior has came up. Further (Gervais, 2001) explained the concept where he says that People like to relate to the stock market as a person having different moods, it can be bad-tempered or high-spirited, it can overreact one day and make amends the next. As we know that human behavior is unpredictable and it behaves differently in different situations. Lately many researchers have suggested the idea that psychological analysis of investors may be very helpful in understanding the financial markets better. To do so it is important to understand the behavioral finance presenting the concept that Investors are not as rational as traditional theory has assumed, and biases in their decision-making can have a cumulative effect on asset prices. To many researchers behavioral finance is a revolution, transforming how people see the markets and what influences prices. The paradigm is shifting. People are continuing to walk across the border from the traditional to the behavioral camp†. (Gervais, 2001, P.2) . On the contrary some people believe that may be its too early call it a revolution. Eugene Fama( Gervais, 2001) argued that Behavioral finance has not really shown impacts on the world prices, and the models contradict each other on different point of times. He gave little credit to behaviorist explanations of trends and anomalies(any occurrence or object that is strange, unusual, or unique) arguing that data-mining techniques make it possible to locate patterns. Other researchers have also criticized the idea that the behavioral finance models tend to replace the traditional models of market functions. The weaknesses in this area, explained by him (Gervais, 2001) are that generally the market behavior displayed is attributed to overreaction and sometimes to under reaction. Where People take the behavior that seems to be easy for the particular study regardless of the fact that whether these biases are the result of underlying economic forces or not. Secondly, Lack of trained and expert people. The field does not have enough trained professionals both academic psychology and traditional finance and so the models that are being put up together are improvised. David Hirshleifer (Gervais, 2001) focuses on the individual behavior influencing asset prices, suggesting that behavioral finance is in its developmental stage and not yet a mature one, theres a lot of disagreement but productive one. Hirshleifer agrees that applying behavioral-finance concepts to corporate finance can pay off. If managers are imperfectly rational, he says, perhaps they are not evaluating investments correctly. They may make bad choices in their capital-structure decisions. Few people realistically think behavioral finance will displace efficient-markets theory. On the other hand, the idea that investors and managers are not uniformly rational makes insightful sense to many people. Traditional Finance Empirical Evidence: â€Å"Traditional theory assumes that agents are rational the law of one price holds† that is a perfect scenario. Where the law of â€Å"One price† states that securities with the same pay off have same price, but in real world this law is violated when people purchase securities in one market for immediate resale in another, in search of higher profits because of price differentials known as â€Å"Arbitrageurs†. And the agents rationality explains the behavior of investor â€Å"Professional Individual† which is generally inconsistent with the rationality or the future predictions. If a market achieves a perfect scenario where agents are rational law of one price holds then the market is efficient. With the availability of amount of information, the form of market changes. It is unlikely that market prices contain all private information. The presence of â€Å"noise traders† (traders, trading randomly not based on information). Researches show that stock returns are typically unpredictable based on past returns where as future returns are predictable to some extent. Few examples from the past literature explains the problem of irrationality which occurs because of naà ¯ve diversification, behavior influenced by framing, the tendency of investors of committing systematic errors while evaluating public information.(Glaser et al, 2003) Recent studies suggest that peoples` attitude towards the riskiness of a stock in future the individual interpretation may explain the higher level trading volume, which itself is a vast topic for insight. A problem of perception exist in the investors that Stocks have a higher risk adjusted returns than bonds. Another issue with the investors is that these investors either care about the whole stock portfolio or just about the value of each single security in their portfolio and thus ignore the correlations. The concept of ownership society has been promoted in the recent years where people can take better care of their own lives and be better citizen too if they are both owner of financial assets and homeowners. As a researcher suggested that in order to improve the lives of less advantaged in our society is to teach them how to be capitalist, In order to put the ownership society in its right perspective, behavioral finance is needed to be understood. The ownership society seems very attractive when people appear to make profits from their investments. Behavioral finance also is very helpful in understanding justifying government involvement in the investing decisions of individuals. The failure of millions of people to save properly for their future is also a core problem of behavioral finance. (Shiller, 2006) According to (Glaser et al, 2003) there are two approaches towards Behavioral Finance, where both tend to have same goals. The goals tend to explain observed prices, Market trading Volume Last but not the least is the individual behavior better than traditional finance models. Belief Based Model: Psychology (Individual Behavior) Incorporates into Model Market prices Transaction Volume. It includes findings such as Overconfidence, Biased Self- Attrition, and Conservatism Representativeness. Preference Based Model: Rational Friction or from psychology Find explanations, Market detects irregularities individual behavior. It incorporates Prospect Theory, House money effect other forms of mental accounting. Behavioral Finance and Rational debate: The article by (Heaton and Rosenberg,2004) highlights the debate between the rational and behavioral model over testability and predictive success. And we find that neither of them actually offers either of these measures of success. The rational approach uses a particular type of rationalization methodology; which goes on to form the basis of behavior finance predictions. A closer look into the rational finance model goes on to show that it employs ex post rationalizations of observed price behaviours. This allows them greater flexibility when offering explanations for economic anomalies. On the other hand the behavior paradigm criticizes rationalizations as having no concrete role in predicting prices accurately, that utility functions, information sets and transaction costs cannot be ‘rationalized. Ironically they also reject the rational finances explanatory power which plays an essential role in the limits of arbitrage, which actually makes behavioral finance possible. Milton Friedmans theory lays the basis of positive economics. His methodology focuses on how to make a particular prediction; it is irrelevant whether a particular assumption is rational or irrational. According to this methodology, the rational finance model relies on a limited â€Å"assumption space since all assumptions that are supposedly not rational have been eliminated. This is one of the major reasons behind the little success in rational finance predictions. Despite the minimal results, adherents of this model have criticized the behavioral model as lacking quantifiable predictions that are based on mathematical models. Rational finance has targeted a more important aspect in the structure of the economy, i.e. investor uncertainty, which further cause financial anomalies. In explaining these assertions, the behavioural emphasises the importance of taking limits in arbitrage. Friedmans methodological approach falls into the category ‘instrumentalism, which basically states that theories are tools for predictions and used to draw inferences. Whether an assumption is realistic or rational is of no value to an instrumentalist. By narrowing what may or may not be possible, one will inevitably eliminate certain strategies or behaviors which might in fact go on to maximize utility or profits based on their uniqueness. An assumption could be irrational even in the long run, but it is continuously revised and refined to make it into something useful. In opposition to this, many individuals have gone on to say that behaviouralists are not bound by any constraints thus making their explanations systematically irrational. Rubinstein (2001) described how when everyone fails to explain a particular anomaly, suddenly a behavioral aspect to it will come up, because that can be based on completely abstract irrational assumptions. To support rationality, Rubinstein came up with two arguments. Firstly he went on to say that an irrational strategy that is profitable, will only attract copy cat firms or traders into the market. This is supported when a closer look is given towards limits to arbitrage. Secondly through the process of evolution, irrational decisions will eventually be eliminated in the long run. The major achievements characterized of the rational finance paradigm consist of the following: the principle of no arbitrage; market efficiency, the net present value decision rule, derivatives valuation techniques; Markowitzs (1952) mean-variance framework; event studies; multifactor models such as the APT, ICAPM, and the Consumption- CAPM. Despite the number of top achievements that supporters of the rational model claim, the paradigm fails to answer some of the most basic financial economic questions such as ‘What is the cost of capital for this firm? or ‘What is its optimal capital structure?; simply because of their self imposed constraints. So far this makes it seem like rational finance and behavioral finance are mutually exclusive. Contrary to this, they are actually interdependent, and overlap in several areas. Take for instance the concept of mispricing when there is no arbitrage. Behavior finance on the other hand suggests that this may not be the case; irrational assumptions in the market will still lead to mispricing. Further even though certain arbitrageurs may be able to identify irrationality induced mispricing, because of the imperfect market information, they are unable to convince investors of its existence. Over here, the rational model is accepting the existence of anomalies which are affected both through the factors of risk and chance; therefore coinciding with the perspective of behavioral finance. Two instances are clear examples of how rationalization is an important limit of arbitrage: i) the build-up and blow-up of the internet bubble; and ii) the superiority of value equity strategies. If we focus on the latter, we are able to see behavioral finance literature that highlights the superiority of such strategies in the ability of analysts to extrapolate results for investors. This is possible when rationalization is taken as a limit to arbitrage. Similarly these strategies may also limit arbitrage against mispricing, through the great risk associated with stocks. In explaining most anomalies it is essential that analysts first conclude whether pricing is rational or not. To prove their hypothesis that irrationality-induced mispricing exists, behaviouralists may find it easier if they accepted the role of rationalization in limits of arbitrage. Slow information diffusion and short-sales constraints are other factors that explain mispricing. However these factors alone cannot form the basis of a strong and concrete explanation that will clarify pricing across firms and also across time. Those supporting the rational paradigm attack behavioral finance adherents in that their predictions for the financial market have been made on irrational assumptions; that are not supported by concrete mathematical or scientific models. In their view the lack of concrete discipline in the methodology adopted in behavior finance leads to the lack of testing in their forecasts. On the other hand the rational model is criticized for its lack of success in financial predictions. The behaviouralists claim that this limitation exists because the supporters of rational finance dismiss aspects of the economic market simply because it may not fall into explainable rational behavior. Both perspectives claim to align themselves with respect to the goals of ‘testability and ‘predictions, while at the same time continue to offer evidence against the other model. In reality however, rather than being exclusively mutual both paradigms assist one another in making their predictions. BODY: A cognitive bias is a persons tendency to make errors, based on cognitive factors. Forms of cognitive bias include errors in statistical judgment, social attribution, and memory that are common to all human beings. (Crowell, 1994, p. 1) â€Å"Cognitive bias is the tendency of intelligent, well-informed people to consistently do the wrong thing†. The reason behind this cognitive bias is that the Human brain is made for interpersonal relationships and not for processing statistics. The paper discusses facility of forecasts. Generally it is said that the world is divided into two groups. One who forecasts positively and one negatively. These forecasts exaggerate the reliability of their forecasts and trace it to the â€Å"illusion of validity† which exists even when the illusionary character is recognized. (Fisher and Statman, 2000) discussed five cognitive bias, underlying the illusion of validity that are Overconfidence, Confirmation, Representativeness, Anchoring, and Hindsight (Shiller, 2002) discusses, that irrational behavior may disappear with more learning and a much more structured situation. As the past research proves it that may of cognitive biases in human judgment value uncertainty will change, they may be convinced if given proper instructions, on the part-experience of irrational behavior. There are three main themes in behavioral finance and economics Heuristics: People often make decisions based on approximate rules of thumb, not strictly rational analysis. See also cognitive biases and bounded rationality. Prospect theory Loss aversion Status quo bias Gamblers fallacy Self-serving bias Money illusion Framing: The way a problem or decision is presented to the decision maker will affect their action. Cognitive framing Mental accounting Anchoring Market inefficiencies: There are explanations for observed market outcomes that are contrary to rational expectations and market efficiency. These include mis-pricings, non-rational decision making, and return anomalies. Richard Thaler, in particular, has described specific market anomalies from a behavioral perspective. Anomalies (economic behavior) Disposition effect Endowment effect Inequity aversion Intertemporal consumption Present-biased preferences Momentum investing Greed and fear Herd behavior Anomalies (market prices and returns) Equity premium puzzle Efficiency wage hypothesis Limits to arbitrage Dividend puzzle Models in behavioral economics are typically addressed to a particular observed market anomaly and adjust standard neo-classical models by describing decision makers as using heuristics and being affected by framing effects. In general, economics sits within the neoclassical framework, though the standard assumption of rational behavior is often challenged. Loix et. Al in their paper â€Å"Orientation towards Finances† explains the individual financial management behavior, people dealing with their financial means. They have analyzed the Non-specific Financial behavior as already we see extensive research on the specific finance behavior such as saving, Taxation, Gambling, amassing debt. But they had given a lot of importance to stock market, investors and households. The analysis of general public`s behavior was done, where an ordinary man is not sure and simply act according to the guesses over their money related issues. It was also found that people interested in economic and financial matters are much more active in collecting specific information than general public, stating that financial behavior of household is an important relevant topic that needs to be discussed in much more details. Household financial management is similar to the financial management. The construct of orientation towards finances was developed where the individual ORTO FIN focuses on competencies (interest and skills). Having stronger money attitude is an indication of stronger orientation towards finances and much more effective competencies. Therefore we expect some relevance and similarity between corporate and household management behavior as both require organizing, forecasting, planning and control. (Loix et. al, 2005) analyzed general publics behavior in basically dividing them into two groups, Financial Information Personal financial planning. Also explaining some practical and theoretical gaps in the area of psychology of money usage, they concluded that ORTOFIN (Orientation towards finance) indicates the involvement of individuals in managing their finances. Proving out the point that active interest in financial information and an urge to plan expenses are two main factors. A stronger ORTFIN indicates: Greater use of debit accounts, Higher savings account, Wide variety of investments, Greater awareness of ones financial Intimate knowledge of the details of Ones savings/deposit accounts obsessed by money, Higher achievement and power in monetary terms, Further age is also inversely proportional. Shiller in 2006, in his article talked about the the co-evolution of neo-classical and behavior finance. In 1937 when A. Samuelsson one of the great economists wrote about people maximizing the present value of utility subject to a present vale budget constraint. Another judgment he realized was time being consistent human behavior where if at any time t 0 Where people reconsidered the problem of maximization from that date forward, they would not change their decision where as in real life it is totally opposite for example people sometimes try to control themselves by binding their future decision as from history we find out that that some of man make irrevocable trust in the taking out of life insurance as a compulsory savings measure. (shiller, 2006, p.) Considering personal saving rate, saving and down for no reason has emerged as a weakness of human self control. People seem to be vulnerable to complacency from time to time about providing for their own future. The distinction between neoclassical and behavioral finance have therefore been exaggerated. Both of them are not completely different from each other. Behavioral finance is more elastic willing to learn from other sciences and less concerned about the elegance of models whereby explaining human behavior Investing and cognitive bias: Money Managers Money management is a very popular phenomenon. The performance in the stock market is measured at the daily basis and not to wait for a highly subjective annual review of ones performance by ones superior. Market grades you on a daily basis. The smarter one is, the more confident one becomes of ones ability to succeed, clients support them by trusting them that eventually helps their careers. But the truth is that few money managers put in sufficient amount of time and effort to figure out what works and develop a set of investment principles to guide their investment decisions (Browne, 2000). Further Browne discussed the importance of asset allocation and risk aversion, in order to understand why we do what we do regardless of whether it is rational or not. General public opts for money Managers to deal with their finances and these managers are categorized in three ways: Value Managers, Growth Managers and Market Neutral Managers. The vast majority of money managers are categorized as either value managers or growth managers although a third category, market neutral managers, is gaining popularity these days and may soon rival the so-called strategies of value and growth. Some investment management firms even are being cautious by offering all styles of investments. What too few money managers do is analyze the fundamental financial characteristics of portfolios that produce long-term market beating results, and develop a set of investment principles that are based on those findings. Difference of opinion on the definition of Value is the problem.The reasons for this are two-fold, one being the practical reality of managing large sums of money, and the other related to behavior. As the assets under management of an advisor grow, the universe of potential stocks shrinks Analyzing that why individual and professional investors do not change their behavior even when they face empirical evidence, that suggests that their decisions are less than optimal. An answer to this question is said to be that being a contrarian may simply be too risky for the average individual or professional. If a person is wrong on the collective basis, where everyone else also had made a mistake, the consequences professionally and for ones own self-esteem are far less than if a person is wrong alone. The herd instinct allows for the comfort of safety in numbers. The other reason is that individuals try to behave the same way and do not tend to change courses of action if they are happy. If the results are not too painful individuals can be happy with sub-optimal results. Moreover, individuals who tend to be unhappy make changes often and eventually end up being just as unhappy in their new circumstances. According to the traditional view of Investment management, fundamental forces drive markets, however many other investment firms considers to be active and working out based on their experienced Judgment. It is also believed that Judgmental overrides of Value Fundamental forces of markets can be lethal as well as a cause of Financial Disappointment. From the history it has been found that people Override at the wrong times and in most cases would be better off sticking to their investment disciplines (Crowell, 1994) and the reason to this behavior is the Cognitive bias. According to many researchers, stocks of small companies with low price/book ratios provide excess returns. Therefore, given a choice among small cheap stocks large high priced stocks, prominent investors (financial analysts, senior company executives and company directors) will certainly prefer the small cheap ones. But the fact is opposite to this situation where these prominent investors would opt for large high priced ones and so suffer from cognitive bias and further regret. According to a survey in 1992/1993, a research was carried out that included senior executives directors where they were suppose to rate companies in their industries on eight factors: Quality of management, Quality of products services, Innovativeness, Long term investment value, Financial soundness, Ability to attract, develop and keep talented people, Responsibility to the community and environment, Wise use of corporate assets. The assumptions that we made were that that â€Å"Long term investment value should be negatively correlated with size since small stocks provide superior returns. Long term Investment value should have a negative correlation with Price/book since low Price/Book stocks provide superior returns†.(Crowell, 1994). Whereas the results of the survey were contrary that stated that Long Term Investment had a positive correlation with the size and also that the Long term investment value had a positive correlation with the Price/Book stocks. According to Shefrin and statman, prominent investors overestimate the probability that a good company is a good stock, relying on the representative heuristics, concluding that superior companies make superior stocks. Aversion to Regret: aversion to regret is different from aversion to risk, Regret is acute when the individual must take responsibility for the final outcome. Aversion to regret leads to a preference for stocks of good companies. The choice of the stocks of bad companies involves more personal responsibility and higher probability of regret. Therefore, we find there are two major Cognitive errors: â€Å"We have a double cognitive error: a Good company make good stocks (representativeness), and involves less responsibility(Less aversion to regret† (Crowell, 1994,p.3) The Anti Cognitive bias actions would be admitting to your owned stocks, admitting earlier investment mistakes. Further Taking the responsibility for the actions to improve their performance in the future. The reasons for all the available disciplines, tools, and quantitative techniques is to deal with the Cognitive bias error, where the quantitative investment techniques enables the investment managers to overcome cognitive bias, follow sound investment, and eventually be successful contrarian investor(one who rejects the majority opinion, as in economic matters). Behavioral finance also is very helpful in understanding justifying government involvement in the investing decisions of individuals. The failure of millions of people to save properly for their future is also a core problem of behavioral finance. With the help of two very important examples Shiller explains how Government involvement can influence financial investments of individuals. In April 2005 â€Å"Tony Blair† stated a program when all new born babies were given a birthday present of 250 to 500. The present were to choose among a number of investment alternatives to invest until child comes of age. This is an effect done in order to make the parents feel connected with investments and modern economy. Another example: as it is said that people should be heavily active in stock market when they are young and so generally should reduce the activity with age. According to the conventional rule people should have 100 Age = % age of investment In 2005 president bush also portfolio announced one such plan for personal account â€Å"life cycle fund† which would be among the option that works will be offered to invest their personal account. It was A centerpiece of the presidents proposal bur a major point to be noticed was the default option. An important aspect of behavioral finance is the human attention is capricious focuses heavily tat same times on financial calculations and are subject to distraction and dissipation of default option is central. All this brings us a question that what should an intertemporal optimizer do to manage his portfolio over the lifetime. According to Samuelson someone who wished to maximize the expected value of his intertemporal utility function by managing the allocation of the portfolio between a high yielding asset and less yielding asset would not actually change the allocation through time. Neoclassic finance appears highly relevant to such a discussion in that it offers the appropriate theoretical framework for considering what people ought to do with the portfolio if not what they actually do. Behavioral is beginning to play an important role in public policy such as in social security reforms. Agents Rationality: Global culture Culture Social Contagion: The selective attention exhibited by a human mind is the concept of culture. Every nation, tribe or asocial group has a social cognition reinforced by conversation ritual and symbols, rituals and supposition of a particular nation has a subtle but far reliability affect on human behavior. Some researchers found that the unique customs of people actually arise as a logical consequence of a belief system of a nation group of people. Cultural factor were found to have great influence on rational or irrational behavior. We find many factors that are same across countries , e.g fashion, music, movies, youthful rebellious, other than these we find more factors in producing internationally- similar human behaviors then just rational reactions. Therefore it is a difficult job to decide in what avenues global culture exerts Efficient Markets Hypothesis (EMH) Efficient Markets Hypothesis (EMH) INTRODUCTION: Much of modern investment theory and practice is predicated on the Efficient Markets Hypothesis (EMH), the assumption that markets fully and instantaneously integrate all available information into market prices. Underlying this comprehensive idea is the assumption that the market participants are perfectly rational, and always act in self-interest, making optimal decisions. These assumptions have been challenged. It is difficult to tip over the Neo classical convention that has yielded such insights as portfolio optimization, the â€Å"Capital Asset Pricing Model†, the â€Å"Arbitrage Pricing Theory†, the â€Å"Cox Ingersoll-Ross theory† of the term structure of interest rates, and the â€Å"Black-S[choles/Merton option pricing model†, all of which are predicated on the EMH (Efficient Market Hypothesis) in one way or another. At few points the EMH criticizes the existing literature of behavioral finance, which shows the difference of opinion on psychology economics. The field of psychology has its roots in empirical observation, controlled experimentation, and clinical applications. According to psychology, behavior is the main entity of study, and only after controlled experimental dimensions do psychologists attempt to make inferences about the origins of such behavior. On the contrary, economists typically derive behavior axiomatically from simple principles such as expected utility maximization, making it easier for us to predict economic behavior that are routinely refuted empirically The biggest threats to Modern Portfolio theory is the theory of Behavioral Finance. It is an analysis of why investors make irrational decisions with respect to their money, normal distribution of expected returns generally appears to be invalid and also that the investors support upside risks rather than downside risks. The theory of Behavioral finance is opposite to the traditional theory of Finance which deals with human emotions, sentiments, conditions, biases on collective as well as individual basis. Behavior finance theory is helpful in explaining the past practices of investors and also to determine the future of investors. Behavioral finance is a concept of finance which deals with finances incorporating findings from psychology sociology. It is reviewed that behavioral finance is generally based on individual behavior or on the implication for financial market outcomes. There are many models explaining behavioral finance that explains investors behavior or market irregularities where the rational models fail to provide adequate information. We do not expect such a research to provide a method to make lots of money from the inefficient financial market very fast. Behavioral finance has basically emerged from the theories of psychology, sociology and anthropology the implications of these theories appear to be significant for the efficient market hypothesis, that is based on the positive notion that people behave rationally, maximize their utility and are able to prices observation, a number of anomalies (irregularities) have appeared, which in turn suggest that in the efficient market the principle of rational behavior is not always correct. So, the idea of analyzing other model of human behavior has came up. Further (Gervais, 2001) explained the concept where he says that People like to relate to the stock market as a person having different moods, it can be bad-tempered or high-spirited, it can overreact one day and make amends the next. As we know that human behavior is unpredictable and it behaves differently in different situations. Lately many researchers have suggested the idea that psychological analysis of investors may be very helpful in understanding the financial markets better. To do so it is important to understand the behavioral finance presenting the concept that Investors are not as rational as traditional theory has assumed, and biases in their decision-making can have a cumulative effect on asset prices. To many researchers behavioral finance is a revolution, transforming how people see the markets and what influences prices. The paradigm is shifting. People are continuing to walk across the border from the traditional to the behavioral camp†. (Gervais, 2001, P.2) . On the contrary some people believe that may be its too early call it a revolution. Eugene Fama( Gervais, 2001) argued that Behavioral finance has not really shown impacts on the world prices, and the models contradict each other on different point of times. He gave little credit to behaviorist explanations of trends and anomalies(any occurrence or object that is strange, unusual, or unique) arguing that data-mining techniques make it possible to locate patterns. Other researchers have also criticized the idea that the behavioral finance models tend to replace the traditional models of market functions. The weaknesses in this area, explained by him (Gervais, 2001) are that generally the market behavior displayed is attributed to overreaction and sometimes to under reaction. Where People take the behavior that seems to be easy for the particular study regardless of the fact that whether these biases are the result of underlying economic forces or not. Secondly, Lack of trained and expert people. The field does not have enough trained professionals both academic psychology and traditional finance and so the models that are being put up together are improvised. David Hirshleifer (Gervais, 2001) focuses on the individual behavior influencing asset prices, suggesting that behavioral finance is in its developmental stage and not yet a mature one, theres a lot of disagreement but productive one. Hirshleifer agrees that applying behavioral-finance concepts to corporate finance can pay off. If managers are imperfectly rational, he says, perhaps they are not evaluating investments correctly. They may make bad choices in their capital-structure decisions. Few people realistically think behavioral finance will displace efficient-markets theory. On the other hand, the idea that investors and managers are not uniformly rational makes insightful sense to many people. Traditional Finance Empirical Evidence: â€Å"Traditional theory assumes that agents are rational the law of one price holds† that is a perfect scenario. Where the law of â€Å"One price† states that securities with the same pay off have same price, but in real world this law is violated when people purchase securities in one market for immediate resale in another, in search of higher profits because of price differentials known as â€Å"Arbitrageurs†. And the agents rationality explains the behavior of investor â€Å"Professional Individual† which is generally inconsistent with the rationality or the future predictions. If a market achieves a perfect scenario where agents are rational law of one price holds then the market is efficient. With the availability of amount of information, the form of market changes. It is unlikely that market prices contain all private information. The presence of â€Å"noise traders† (traders, trading randomly not based on information). Researches show that stock returns are typically unpredictable based on past returns where as future returns are predictable to some extent. Few examples from the past literature explains the problem of irrationality which occurs because of naà ¯ve diversification, behavior influenced by framing, the tendency of investors of committing systematic errors while evaluating public information.(Glaser et al, 2003) Recent studies suggest that peoples` attitude towards the riskiness of a stock in future the individual interpretation may explain the higher level trading volume, which itself is a vast topic for insight. A problem of perception exist in the investors that Stocks have a higher risk adjusted returns than bonds. Another issue with the investors is that these investors either care about the whole stock portfolio or just about the value of each single security in their portfolio and thus ignore the correlations. The concept of ownership society has been promoted in the recent years where people can take better care of their own lives and be better citizen too if they are both owner of financial assets and homeowners. As a researcher suggested that in order to improve the lives of less advantaged in our society is to teach them how to be capitalist, In order to put the ownership society in its right perspective, behavioral finance is needed to be understood. The ownership society seems very attractive when people appear to make profits from their investments. Behavioral finance also is very helpful in understanding justifying government involvement in the investing decisions of individuals. The failure of millions of people to save properly for their future is also a core problem of behavioral finance. (Shiller, 2006) According to (Glaser et al, 2003) there are two approaches towards Behavioral Finance, where both tend to have same goals. The goals tend to explain observed prices, Market trading Volume Last but not the least is the individual behavior better than traditional finance models. Belief Based Model: Psychology (Individual Behavior) Incorporates into Model Market prices Transaction Volume. It includes findings such as Overconfidence, Biased Self- Attrition, and Conservatism Representativeness. Preference Based Model: Rational Friction or from psychology Find explanations, Market detects irregularities individual behavior. It incorporates Prospect Theory, House money effect other forms of mental accounting. Behavioral Finance and Rational debate: The article by (Heaton and Rosenberg,2004) highlights the debate between the rational and behavioral model over testability and predictive success. And we find that neither of them actually offers either of these measures of success. The rational approach uses a particular type of rationalization methodology; which goes on to form the basis of behavior finance predictions. A closer look into the rational finance model goes on to show that it employs ex post rationalizations of observed price behaviours. This allows them greater flexibility when offering explanations for economic anomalies. On the other hand the behavior paradigm criticizes rationalizations as having no concrete role in predicting prices accurately, that utility functions, information sets and transaction costs cannot be ‘rationalized. Ironically they also reject the rational finances explanatory power which plays an essential role in the limits of arbitrage, which actually makes behavioral finance possible. Milton Friedmans theory lays the basis of positive economics. His methodology focuses on how to make a particular prediction; it is irrelevant whether a particular assumption is rational or irrational. According to this methodology, the rational finance model relies on a limited â€Å"assumption space since all assumptions that are supposedly not rational have been eliminated. This is one of the major reasons behind the little success in rational finance predictions. Despite the minimal results, adherents of this model have criticized the behavioral model as lacking quantifiable predictions that are based on mathematical models. Rational finance has targeted a more important aspect in the structure of the economy, i.e. investor uncertainty, which further cause financial anomalies. In explaining these assertions, the behavioural emphasises the importance of taking limits in arbitrage. Friedmans methodological approach falls into the category ‘instrumentalism, which basically states that theories are tools for predictions and used to draw inferences. Whether an assumption is realistic or rational is of no value to an instrumentalist. By narrowing what may or may not be possible, one will inevitably eliminate certain strategies or behaviors which might in fact go on to maximize utility or profits based on their uniqueness. An assumption could be irrational even in the long run, but it is continuously revised and refined to make it into something useful. In opposition to this, many individuals have gone on to say that behaviouralists are not bound by any constraints thus making their explanations systematically irrational. Rubinstein (2001) described how when everyone fails to explain a particular anomaly, suddenly a behavioral aspect to it will come up, because that can be based on completely abstract irrational assumptions. To support rationality, Rubinstein came up with two arguments. Firstly he went on to say that an irrational strategy that is profitable, will only attract copy cat firms or traders into the market. This is supported when a closer look is given towards limits to arbitrage. Secondly through the process of evolution, irrational decisions will eventually be eliminated in the long run. The major achievements characterized of the rational finance paradigm consist of the following: the principle of no arbitrage; market efficiency, the net present value decision rule, derivatives valuation techniques; Markowitzs (1952) mean-variance framework; event studies; multifactor models such as the APT, ICAPM, and the Consumption- CAPM. Despite the number of top achievements that supporters of the rational model claim, the paradigm fails to answer some of the most basic financial economic questions such as ‘What is the cost of capital for this firm? or ‘What is its optimal capital structure?; simply because of their self imposed constraints. So far this makes it seem like rational finance and behavioral finance are mutually exclusive. Contrary to this, they are actually interdependent, and overlap in several areas. Take for instance the concept of mispricing when there is no arbitrage. Behavior finance on the other hand suggests that this may not be the case; irrational assumptions in the market will still lead to mispricing. Further even though certain arbitrageurs may be able to identify irrationality induced mispricing, because of the imperfect market information, they are unable to convince investors of its existence. Over here, the rational model is accepting the existence of anomalies which are affected both through the factors of risk and chance; therefore coinciding with the perspective of behavioral finance. Two instances are clear examples of how rationalization is an important limit of arbitrage: i) the build-up and blow-up of the internet bubble; and ii) the superiority of value equity strategies. If we focus on the latter, we are able to see behavioral finance literature that highlights the superiority of such strategies in the ability of analysts to extrapolate results for investors. This is possible when rationalization is taken as a limit to arbitrage. Similarly these strategies may also limit arbitrage against mispricing, through the great risk associated with stocks. In explaining most anomalies it is essential that analysts first conclude whether pricing is rational or not. To prove their hypothesis that irrationality-induced mispricing exists, behaviouralists may find it easier if they accepted the role of rationalization in limits of arbitrage. Slow information diffusion and short-sales constraints are other factors that explain mispricing. However these factors alone cannot form the basis of a strong and concrete explanation that will clarify pricing across firms and also across time. Those supporting the rational paradigm attack behavioral finance adherents in that their predictions for the financial market have been made on irrational assumptions; that are not supported by concrete mathematical or scientific models. In their view the lack of concrete discipline in the methodology adopted in behavior finance leads to the lack of testing in their forecasts. On the other hand the rational model is criticized for its lack of success in financial predictions. The behaviouralists claim that this limitation exists because the supporters of rational finance dismiss aspects of the economic market simply because it may not fall into explainable rational behavior. Both perspectives claim to align themselves with respect to the goals of ‘testability and ‘predictions, while at the same time continue to offer evidence against the other model. In reality however, rather than being exclusively mutual both paradigms assist one another in making their predictions. BODY: A cognitive bias is a persons tendency to make errors, based on cognitive factors. Forms of cognitive bias include errors in statistical judgment, social attribution, and memory that are common to all human beings. (Crowell, 1994, p. 1) â€Å"Cognitive bias is the tendency of intelligent, well-informed people to consistently do the wrong thing†. The reason behind this cognitive bias is that the Human brain is made for interpersonal relationships and not for processing statistics. The paper discusses facility of forecasts. Generally it is said that the world is divided into two groups. One who forecasts positively and one negatively. These forecasts exaggerate the reliability of their forecasts and trace it to the â€Å"illusion of validity† which exists even when the illusionary character is recognized. (Fisher and Statman, 2000) discussed five cognitive bias, underlying the illusion of validity that are Overconfidence, Confirmation, Representativeness, Anchoring, and Hindsight (Shiller, 2002) discusses, that irrational behavior may disappear with more learning and a much more structured situation. As the past research proves it that may of cognitive biases in human judgment value uncertainty will change, they may be convinced if given proper instructions, on the part-experience of irrational behavior. There are three main themes in behavioral finance and economics Heuristics: People often make decisions based on approximate rules of thumb, not strictly rational analysis. See also cognitive biases and bounded rationality. Prospect theory Loss aversion Status quo bias Gamblers fallacy Self-serving bias Money illusion Framing: The way a problem or decision is presented to the decision maker will affect their action. Cognitive framing Mental accounting Anchoring Market inefficiencies: There are explanations for observed market outcomes that are contrary to rational expectations and market efficiency. These include mis-pricings, non-rational decision making, and return anomalies. Richard Thaler, in particular, has described specific market anomalies from a behavioral perspective. Anomalies (economic behavior) Disposition effect Endowment effect Inequity aversion Intertemporal consumption Present-biased preferences Momentum investing Greed and fear Herd behavior Anomalies (market prices and returns) Equity premium puzzle Efficiency wage hypothesis Limits to arbitrage Dividend puzzle Models in behavioral economics are typically addressed to a particular observed market anomaly and adjust standard neo-classical models by describing decision makers as using heuristics and being affected by framing effects. In general, economics sits within the neoclassical framework, though the standard assumption of rational behavior is often challenged. Loix et. Al in their paper â€Å"Orientation towards Finances† explains the individual financial management behavior, people dealing with their financial means. They have analyzed the Non-specific Financial behavior as already we see extensive research on the specific finance behavior such as saving, Taxation, Gambling, amassing debt. But they had given a lot of importance to stock market, investors and households. The analysis of general public`s behavior was done, where an ordinary man is not sure and simply act according to the guesses over their money related issues. It was also found that people interested in economic and financial matters are much more active in collecting specific information than general public, stating that financial behavior of household is an important relevant topic that needs to be discussed in much more details. Household financial management is similar to the financial management. The construct of orientation towards finances was developed where the individual ORTO FIN focuses on competencies (interest and skills). Having stronger money attitude is an indication of stronger orientation towards finances and much more effective competencies. Therefore we expect some relevance and similarity between corporate and household management behavior as both require organizing, forecasting, planning and control. (Loix et. al, 2005) analyzed general publics behavior in basically dividing them into two groups, Financial Information Personal financial planning. Also explaining some practical and theoretical gaps in the area of psychology of money usage, they concluded that ORTOFIN (Orientation towards finance) indicates the involvement of individuals in managing their finances. Proving out the point that active interest in financial information and an urge to plan expenses are two main factors. A stronger ORTFIN indicates: Greater use of debit accounts, Higher savings account, Wide variety of investments, Greater awareness of ones financial Intimate knowledge of the details of Ones savings/deposit accounts obsessed by money, Higher achievement and power in monetary terms, Further age is also inversely proportional. Shiller in 2006, in his article talked about the the co-evolution of neo-classical and behavior finance. In 1937 when A. Samuelsson one of the great economists wrote about people maximizing the present value of utility subject to a present vale budget constraint. Another judgment he realized was time being consistent human behavior where if at any time t 0 Where people reconsidered the problem of maximization from that date forward, they would not change their decision where as in real life it is totally opposite for example people sometimes try to control themselves by binding their future decision as from history we find out that that some of man make irrevocable trust in the taking out of life insurance as a compulsory savings measure. (shiller, 2006, p.) Considering personal saving rate, saving and down for no reason has emerged as a weakness of human self control. People seem to be vulnerable to complacency from time to time about providing for their own future. The distinction between neoclassical and behavioral finance have therefore been exaggerated. Both of them are not completely different from each other. Behavioral finance is more elastic willing to learn from other sciences and less concerned about the elegance of models whereby explaining human behavior Investing and cognitive bias: Money Managers Money management is a very popular phenomenon. The performance in the stock market is measured at the daily basis and not to wait for a highly subjective annual review of ones performance by ones superior. Market grades you on a daily basis. The smarter one is, the more confident one becomes of ones ability to succeed, clients support them by trusting them that eventually helps their careers. But the truth is that few money managers put in sufficient amount of time and effort to figure out what works and develop a set of investment principles to guide their investment decisions (Browne, 2000). Further Browne discussed the importance of asset allocation and risk aversion, in order to understand why we do what we do regardless of whether it is rational or not. General public opts for money Managers to deal with their finances and these managers are categorized in three ways: Value Managers, Growth Managers and Market Neutral Managers. The vast majority of money managers are categorized as either value managers or growth managers although a third category, market neutral managers, is gaining popularity these days and may soon rival the so-called strategies of value and growth. Some investment management firms even are being cautious by offering all styles of investments. What too few money managers do is analyze the fundamental financial characteristics of portfolios that produce long-term market beating results, and develop a set of investment principles that are based on those findings. Difference of opinion on the definition of Value is the problem.The reasons for this are two-fold, one being the practical reality of managing large sums of money, and the other related to behavior. As the assets under management of an advisor grow, the universe of potential stocks shrinks Analyzing that why individual and professional investors do not change their behavior even when they face empirical evidence, that suggests that their decisions are less than optimal. An answer to this question is said to be that being a contrarian may simply be too risky for the average individual or professional. If a person is wrong on the collective basis, where everyone else also had made a mistake, the consequences professionally and for ones own self-esteem are far less than if a person is wrong alone. The herd instinct allows for the comfort of safety in numbers. The other reason is that individuals try to behave the same way and do not tend to change courses of action if they are happy. If the results are not too painful individuals can be happy with sub-optimal results. Moreover, individuals who tend to be unhappy make changes often and eventually end up being just as unhappy in their new circumstances. According to the traditional view of Investment management, fundamental forces drive markets, however many other investment firms considers to be active and working out based on their experienced Judgment. It is also believed that Judgmental overrides of Value Fundamental forces of markets can be lethal as well as a cause of Financial Disappointment. From the history it has been found that people Override at the wrong times and in most cases would be better off sticking to their investment disciplines (Crowell, 1994) and the reason to this behavior is the Cognitive bias. According to many researchers, stocks of small companies with low price/book ratios provide excess returns. Therefore, given a choice among small cheap stocks large high priced stocks, prominent investors (financial analysts, senior company executives and company directors) will certainly prefer the small cheap ones. But the fact is opposite to this situation where these prominent investors would opt for large high priced ones and so suffer from cognitive bias and further regret. According to a survey in 1992/1993, a research was carried out that included senior executives directors where they were suppose to rate companies in their industries on eight factors: Quality of management, Quality of products services, Innovativeness, Long term investment value, Financial soundness, Ability to attract, develop and keep talented people, Responsibility to the community and environment, Wise use of corporate assets. The assumptions that we made were that that â€Å"Long term investment value should be negatively correlated with size since small stocks provide superior returns. Long term Investment value should have a negative correlation with Price/book since low Price/Book stocks provide superior returns†.(Crowell, 1994). Whereas the results of the survey were contrary that stated that Long Term Investment had a positive correlation with the size and also that the Long term investment value had a positive correlation with the Price/Book stocks. According to Shefrin and statman, prominent investors overestimate the probability that a good company is a good stock, relying on the representative heuristics, concluding that superior companies make superior stocks. Aversion to Regret: aversion to regret is different from aversion to risk, Regret is acute when the individual must take responsibility for the final outcome. Aversion to regret leads to a preference for stocks of good companies. The choice of the stocks of bad companies involves more personal responsibility and higher probability of regret. Therefore, we find there are two major Cognitive errors: â€Å"We have a double cognitive error: a Good company make good stocks (representativeness), and involves less responsibility(Less aversion to regret† (Crowell, 1994,p.3) The Anti Cognitive bias actions would be admitting to your owned stocks, admitting earlier investment mistakes. Further Taking the responsibility for the actions to improve their performance in the future. The reasons for all the available disciplines, tools, and quantitative techniques is to deal with the Cognitive bias error, where the quantitative investment techniques enables the investment managers to overcome cognitive bias, follow sound investment, and eventually be successful contrarian investor(one who rejects the majority opinion, as in economic matters). Behavioral finance also is very helpful in understanding justifying government involvement in the investing decisions of individuals. The failure of millions of people to save properly for their future is also a core problem of behavioral finance. With the help of two very important examples Shiller explains how Government involvement can influence financial investments of individuals. In April 2005 â€Å"Tony Blair† stated a program when all new born babies were given a birthday present of 250 to 500. The present were to choose among a number of investment alternatives to invest until child comes of age. This is an effect done in order to make the parents feel connected with investments and modern economy. Another example: as it is said that people should be heavily active in stock market when they are young and so generally should reduce the activity with age. According to the conventional rule people should have 100 Age = % age of investment In 2005 president bush also portfolio announced one such plan for personal account â€Å"life cycle fund† which would be among the option that works will be offered to invest their personal account. It was A centerpiece of the presidents proposal bur a major point to be noticed was the default option. An important aspect of behavioral finance is the human attention is capricious focuses heavily tat same times on financial calculations and are subject to distraction and dissipation of default option is central. All this brings us a question that what should an intertemporal optimizer do to manage his portfolio over the lifetime. According to Samuelson someone who wished to maximize the expected value of his intertemporal utility function by managing the allocation of the portfolio between a high yielding asset and less yielding asset would not actually change the allocation through time. Neoclassic finance appears highly relevant to such a discussion in that it offers the appropriate theoretical framework for considering what people ought to do with the portfolio if not what they actually do. Behavioral is beginning to play an important role in public policy such as in social security reforms. Agents Rationality: Global culture Culture Social Contagion: The selective attention exhibited by a human mind is the concept of culture. Every nation, tribe or asocial group has a social cognition reinforced by conversation ritual and symbols, rituals and supposition of a particular nation has a subtle but far reliability affect on human behavior. Some researchers found that the unique customs of people actually arise as a logical consequence of a belief system of a nation group of people. Cultural factor were found to have great influence on rational or irrational behavior. We find many factors that are same across countries , e.g fashion, music, movies, youthful rebellious, other than these we find more factors in producing internationally- similar human behaviors then just rational reactions. Therefore it is a difficult job to decide in what avenues global culture exerts