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Innovative Practices for Competitive Advantage through Behavioral Finance

Author

Listed:
  • Rani Ladha

    (Indian Institute of Management Kozhikode)

  • Bindu P Menon

    (Nil)

Abstract

The field of behavioral finance itself can be considered an innovation. The two key building blocks of behavioural finance are cognitive psychology and limits to arbitrage. It provides a way to reconcile some of the market and individual anomalies observed under the traditional finance paradigm. Behavioural Finance complements the traditional finance models by incorporating individual biases and psychology. This paper attempts to apply behavioural concepts to the field of investment management. With increased globalization it may be necessary to incorporate individual preferences in product development, offerings and positioning to gain a competitive advantage. While the field of investment management has continuously evolved with several innovations, this paper suggests that application of behavioural concepts is the next stage in that evolution. It is already being applied in several contexts and has a few policy implications.

Suggested Citation

  • Rani Ladha & Bindu P Menon, 2011. "Innovative Practices for Competitive Advantage through Behavioral Finance," Working papers 112, Indian Institute of Management Kozhikode.
    • Handle: RePEc:iik:wpaper:112
    as

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    References listed on IDEAS

    as
    1. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128, Elsevier.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    3. Richard H. Thaler & Shlomo Benartzi, 2001. "Naive Diversification Strategies in Defined Contribution Saving Plans," American Economic Review, American Economic Association, vol. 91(1), pages 79-98, March.
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