Friday, December 6, 2019

Financial Management for Efficient Market-

Question: Discuss about theFinancial Management for Efficient Market. Answer: One of the key assumptions which act as the bedrock of neo-economics is the assumption about the behaviour of people with regards to their rational preferences which allows for homogeneity in behaviour and intent which allows for theory building. Their key objective is to maximise their utility based on their respective income or resources as the case may be. This is assumed to hold true for both producers and consumers while making economic decisions. On the other hand if it is taken into consideration that humans may not always be rational in their pursuit of objectives, then theory building may not be possible as these rationality results in definition of one most efficient path to achieve a given objective (Krugman Wells, 2013). Theoretically, the above assumption makes sense as any given person would like to draw maximum utility from the available resources at hand. But in the pursuit of this objective, decisions are not always rationale. A case in point is the investment in stock markets which are highly driven by the emotions of greed and fear which has led to the advent of behavioural finance. While there are theories such as EMH (Efficient Market Hypothesis) and CAPM (Capital Asset Pricing Model) which are based on the notion of investor being rationale. However, evidence suggests otherwise which is why modifications are being made in these models so as to make them more practical (Damodaran, 2010). Thus, man being rationale does lead to useful theory building but useful modifications have to be made in wake of underlying irrationality in human decision making. Reference Damodaran, A. (2008), Corporate Finance (2nd ed.), London: Wiley Publications Krugman, P. Wells, G. (2013), Microeconomics (3rd ed.), London: Worth Publishers

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