Do you believe that equity fund managers with a good knowledge of Essay

Do you believe that equity fund managers with a good knowledge of behavioural finance can consistently outperform the market on a risk-adjusted basis Give reas - Essay Example y tries to point out that as the fund managers receive information they react spontaneously and update their briefs as soon as possible and also explains that given their briefs they make choices that are normatively acceptable1. Whereas, behavioural finance as mentioned is a new phenomenon which points out areas that are more towards reality because it tries to explain investors’ or the fund managers’ decisions by application of models and tools that takes into account the irrationality of the investors; thus here, it tries to talk about what happens when fund managers do not update their briefs as quickly and also do not stay in the acceptable norms. The proponents of behavioural finance argue that use of traditional pricing or valuing techniques such as capital asset pricing models, dividend discount models, relative valuation models etc. does not always explain why the excess returns have been earned at the end of the day by the investors in the light of the efficient markets, thus suggesting that if investors were rational then these techniques would rightly project the prices and no security would have been traded excepting at their fair values. Whereas, behavioural finance attempts to points out the anomalies in the fair values and the decisions that fund managers make in the market. The flawed or the irrational human behaviour is a victim to the phenomena like herd mentality, contagion effect, loss aversion, extrapolation, hindsight bias and illusions of control2. Here emotional factors and intuition to a large extent are the decisive factors in trading. Some of the most likely occurrences that can lead to fund managers deviate from making rational decisions in the market include importance of playing safe compared to earning high risk significant gains and also following the herd versus relying on self. Fund managers when offered a sure shot amount compared to something that is doubtful are more likely to accept the sure amount and forego any larger