03 Mar Within business, working professionals should become comfortable receiving and giving constructive feedback. Critical analysis o

Directions

Peer Response

Within business, working professionals should become comfortable receiving and giving constructive feedback. Critical analysis of topics, and providing and receiving constructive feedback, is important in one’s professional growth and development and a core competency for leaders. You will be expected to read the initial posting of at least ONE peer or instructor, and then provide constructive criticism to their peers’ initial postings. You should highlight strengths as well as opportunities for improvement:

1. Point out what you perceived to be the strengths of the initial posting along with supporting rationale.

2. Identify specific opportunities for improvement with regard to the content in the initial posting. Furthermore, you should provide supporting rationale for your stated position, as well as concrete suggestions and guidance intended to strengthen the effectiveness of the content.

Each response should be a minimum of 250 words

Allison Ligier

Assess the systematic behavioral biases which impact individual investors.

When it comes to investing funds an investor advantage is diversifying their portfolios to reduce risk without reducing their expected return (Berk & DeMarzo, 2020). There are many reasons why investors do not diversify their portfolios despite knowing that they are certain to have returns on their investments within diversification. That being said, there are also reasons for systematic behavioral biases that lead investors to create undiversified portfolios such as familiarity, relative wealth concerns, overconfidence, disposition effect, and herd behavior.

Investors tend to suffer from familiarity bias which means they invest in companies they are familiar with (Berk & DeMarzo, 2020). For example, an investor may be familiar apple, because who doesn’t own an iPad these days, and that is something they feel okay with sinking money into as they buy into the product. Some investors have a tendency to develop a portfolio similar peers, a “if they did it, why shouldn’t I” mentality (Berk & DeMarzo, 2020). This is considered herd behavior in which investors follow trends and imitate each other’s actions given that they believe these peers or other investors are more knowledgeable within the market (Berk & DeMarzo, 2020). In a study conducted by Madaan and Singh (2019), they state that it is human nature to refer, observe, and imitate each other’s behavior during irregular conditions in financial markets. Given that we are in times are hardship, the herd is moving towards fimilar, “safe”, investments as they are scared of being let down.

Furthermore, Madaan and Singh (2019) define the disposition effect as “the tendency of investors to refrain from realized loss in expectations of realized gains.” This practice tends to be counterproductive because investors end up holding on to their stock that have lost value and sell stocks too early as they have risen in value since purchased. Additionally, investors tend to overestimate the precision of their knowledge thinking that if they trade more, they will not earn higher returns (Berk & DeMarzo, 2020). This practice could be harmful given that they could end up worse due to trading fees.

In conclusion, systematic behavioral biases impact individual investor’s decisions in many ways.  Bias causes them to miss out on returns to all levels they are sure to get portfolio diversification. Investors put too much weight on their own experience rather than historical evidence (Berk & DeMarzo, 2020). If investors are utilizing strategies that earn them negative returns, wiser investors could use this to their advantage to earn positive returns. Investors need to always remember even the biggest expert can lose money as investing is never a sure thing. Fear should not outweigh sound, rational risk analysis.

References

Berk, J. & DeMarzo, P. (2022). Corporate Finance (5th ed.). Retrieved March 2, 2022. Pearson.

Madaan, G. & Singh, S. (2019). An Analysis of Behavioral Biases in Investment DecisionMaking. International Journal of Financial Research. 10. 55. 10.5430/ijfr.v10n4p55. Retrieved March 2, 2022.