A study on Behavioural Corporate Finance

Abstract

Behaviour is all about emotions, personalities, psychology, and sociologtj. And finance is all about numbers, equations, statistics, and balance sheets. The most common assumption of standard finance is that human beings are "rational." This means that humans analyze the pros and cons of any situation and then choose the one which is best for them. In the past few years, a lot of people have started practicing investment. W/nle most of these investment decisions are based on research and logic, some decisions are a result of your mood or instinct, and chances are, there may not be any logic behind that. Behavioral finance (of which behavioral corporate finance is a sub-discipline) integrates psychology and economics into the study of human judgment and biases in decision making under conditions of uncertainty. Behavioral corporate finance argues that in many senses, corporations are natural arbitrageurs. Behavioral finance is an area of study focused on how psychological influences can affect market outcomes. Behavioral finance can be analyzed to understand different outcomes across a variety of sectors and industries. One of the key aspects of behavioral finance studies is the influence of psychological biases. Corporate finance has three main areas of concern: capital budgeting, capital structure, and working capital. The two pillars of behavioral finance are cognitive psychology (how people think) and the limits to arbitrage (when markets will be inefficient). Behavioural finance studies how decisions are made by all kind of investors, from private individuals to professional investors and covers all spectrums of the financial arena (pensions, insurance, capital and money markets). In particular, there are four elements within corporate finance that everyone should be mindful of when doing any type of analysis. These four elements are operating flows, invested capital, cost of capital, and return on i11vested capital. Behavioral Finance is the study of the influence of psychology on the behavior of investors or financia l analysts_ It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own biases.