An Overview of Behavioral Finance and Revisiting the Behavioral Life Cycle Hypothesis

-- Yasmine H Abdel Razek

This paper attempts to introduce an overview of the field of behavioral finance, its building blocks and how it relates to the traditional mainstream finance discipline. In addition, it revisits the behavioral life cycle model that is based on the traditional life cycle model. The point of introducing this model is to show that behavioral finance and traditional finance should not be always at war. They could actually complement each other and produce eventually modified models with enhanced predictive power.

© 2011 IUP. All Rights Reserved.

Misattribution Bias: The Role of Emotion in Risk Tolerance

-- Everton Anger Cavalheiro, Kelmara Mendes Vieira, Paulo Sérgio Ceretta,
Larissa de Lima Trindade and Carlos Eduardo Moreira Tavares

Recently, there has been an increased interest in risk tolerance. The level of risk tolerance of an individual has a direct influence on consumption and on the way he/she will assign his/her assets; it is understood that less tolerant individuals look for safer options for their investments. In order to test a possible influence of emotion on risk tolerance, a 1,016-individual survey was carried out in Brazil. Also, to define the emotional factor for risk tolerance, we have mainly used confirmatory factor analysis and two tests: KMO and Bartlett’s sphericity test. Afterwards, a regression analysis was made to test the influence of emotion on the tolerance level of the tested individuals. The results indicate a misattribution bias for the case of the decision process in individuals with positive humor who have shown to be more tolerant to risk.

© 2011 IUP. All Rights Reserved.

A Study of Psychological Reasons for Gender Differences in Preferences for Risk and Investment Decision Making

-- Manish Mittal and R K Vyas

Men and women differ in their attitudes towards and preferences for risk while investing. Psychologists suggest that women lack confidence and are more methodical in their information processing and accumulation style. These factors contribute to the increased perception of risk in them as compared to men. The paper investigates whether women are more risk-averse than men and the reasons suggested by psychologists for the same. The study indicates that men engage in more risk taking and are more overconfident than women. Women tend to put in a major portion of their funds in low risk – low return investments. However, the study suggests that men and women do not differ in their information processing and accumulation styles.

© 2011 IUP. All Rights Reserved.

Exit Routes in LBO: Does Leverage Solve Risk-Taking Problem?

-- O Yousfi

The current paper studies the financial structure in buyout firms under moral hazard due to unobservable efforts and an excessive risk-taking. The choice of the exit route may lead to agency conflicts between the entrepreneur and the Leveraged Buyout (LBO) firm: the former may take very risky decisions to increase the probability of IPO exit. If the target is going public, he gets a non-transferable and private benefit. The opportunistic behavior of the entrepreneur decreases the probability of sale exit, the preferred exit route of the LBO firm. Without moral hazard, there are many ways to finance the project and the two agents exert strictly positive efforts. With moral hazard, the entrepreneur, the LBO firm and the bank must jointly finance the buyout. Financing the project through standard debt-equity contracts does not implement the first best solution. Only a set of projects can be financed through both the LBO fund and the bank at the macroeconomic level. If the entrepreneur is not wealthy enough, her project is not undertaken.

© 2011 IUP. All Rights Reserved.