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A study of behavioral finance in the Indian stock exchange

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  1. Introduction
  2. An overview of behavioral finance
    1. Objectives of the study
    2. Sources of information
    3. Limitations of the study
  3. Profile of Hyderabad Stock Exchange
  4. Investing in Securities Market
  5. Industry profile
    1. Historical evolution
    2. Definitions
    3. Scope and implications
  6. A study of various biases or heuristics
    1. Applicability of such biases in Indian stock market
  7. Application of behavioral finance
  8. Bibliography
  9. Conclusion

Much of economic and financial theory is based on the notion that individuals act rationally and consider all available information in the decision-making process. However, researchers have uncovered a surprisingly large amount of evidence that this is frequently not the case. Peter L. Bernstein in Against The Gods states that the evidence "reveals repeated patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions and choices when faced with uncertainty." A field known as "behavioral finance" has evolved that attempts to better understand and explain how emotions and cognitive errors influence investors and the decision-making process. Many researchers believe that the study of psychology and other social sciences can shed considerable light on the efficiency of financial markets as well as explain many stock market anomalies, market bubbles, and crashes. As an example, some believe that the out performance of value investing results from investor's irrational overconfidence in exciting growth companies and from the fact that investors generate pleasure and pride from owning growth stocks. Many researchers believe that these human flaws are consistent, predictable, and can be exploited for profit.

[...] Clearing House: The Exchange set-up a Clearing House to collect the Securities from all the Members and distribute to each member, all the securities due in respect of every settlement. The whole of the operations of the Clearing House were also computerized. Inter Connected Market System (ICMS): The Hyderabad Stock Exchange was the convener of a Committee constituted by the Federation of Indian Stock Exchanges for implementing an Inter-connected Market System(ICMS) in which the Screen Based Trading systems of various Stock Exchanges was inter-connected to create a large National Market. SEBI welcomed the creation of ICMS. [...]

[...] Cr) Opens Closes Offer Price List Price Var CHAPTER 8 APPLICATION OF BEHAVIORAL FINANCE The first application concerns inflation and the stock market. Below, is the list of some specific assumptions about a hypothetical firm, and the question is, much is the equity of this firm worth?? Assumptions: The inflation rate is and the equity risk premium is zero, so the nominal cost of capital is 10% real cost of capital of The firm wants to keep the real value of its debt unchanged, so it must increase the nominal amount of debt by each year. [...]

[...] Despite its recent attention, however, the study of behavioral finance is not a new phenomenon. Two books written in the 1800's, The Crowd by Gustave Le Bon and Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, are still considered by many investors as classics in the field of group behavior with application to the investment markets. Behavioral finance has evolved from attempts to better understand and explain how emotions and cognitive errors influence investors and the decision-making process. [...]

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