ACHARYABANGLOREB-

SCHOOL

ASSI
GNMENTON
BEHAVI
ORALFI
NANCE&VALUEI
NVESTI
NG

SUBMI
TTEDTO:
- SUBMI
TTEDBY:
-

PROF.
SHI
VAPRASAD DANTHURIVI
NAY

PGDM PGDM (
BIFAS)
1.Al
l
iasPar
adoxesTheor
y:-
TheAl
l
aispar
adoxwasdev
elopedby
 Maur
iceAl
l
ais 
i
nhi
spaper“
LeCompor
tmentde
l
’
homme r
ati
onal
e dev
antl
eri
squé:cr
it
ique des post
ulat
es etaxi
oms de l
’
écol
e
Amer
icana”
,1953andi
tdescr
ibest
heempi
ri
cal
l
ydemonst
rat
edf
actt
hati
ndi
vi
dual
s’
deci
si
onscanbei
nconsi
stentwi
t expect
h  edut
il
it
ytheor
y. Thi
spar
adoxi
susual
l
y
expl
ainedwi
thAl
l
aisexper
iment
,whi
chi
s:

Ani
ndi
vi
dual
isaskedt
ochooseonebet
weent
hef
oll
owi
nggambl
es:

Gambl
eA:
 100%chanceofr
ecei
vi
ng100mi
l
li
ons

Gambl
eB:
  10%chanceofr
ecei
vi
ng500mi
l
li
ons,

89%chanceofr
ecei
vi
ng100mi
l
li
ons,

 1%chanceofr
ecei
vi
ngnot
hing

Andanot
heramongstt
hef
oll
owi
ng:

Gambl
eC:
 11%chanceofr
ecei
vi
ng100mi
l
li
ons,

   89%chanceofr
ecei
vi
ngnot
hing

Gambl
eD:
  10%chanceofr
ecei
vi
ng500mi
l
li
ons,

    
90%chanceofr
ecei
vi
ngnot
hing

 
Not
e:-

I
fexpect
  edut
il
it
y axi
omat
icwasappl
i
ed,
thepr
efer
enceA>Bshoul
dimpl
ythatC
>D.Howev
er,t
heexper
imentshowst
hatmostr
ati
onali
ndi
vi
dual
swoul
dchooseso
t
hatA>BbutC<D,ev
ent
houghi
tcanbeeasi
l
yseent
hatt
heexpect
edv
alueofeach
gambl
eisa=100,
b=139,
c=11andd=50.

I
nthef
ir
stgambl
ethel r
ess i
skychoi
ce 
i
spr
efer
redov
erahi
gherexpect
edut
il
it
y,
whi
l
eint
hesecondgambl
eahi
gherexpect
edut
il
it
yispr
efer
redov
eral
essr
iskychoi
ce.
 Thi
spar
adoxr
eli
esi
nthef
actt
hati
ncer
tai
nty
pesofgambl
i
ng,al
though
peopl
eusual
l
ypr
efercer
tai
ntyt
o uncer
tai
nty
,ift
heyar
eappr
oacheddi
ff
erent
ly,
theywi
l
l
pr
efert
heuncer
tai
ntyt
hatwaspr
evi
ousl
yrej
ect
ed.Ther
efor
ewecanext
ractaser
iesof
concl
usi
ons.Fi
rst
,aswehav
eseen,i
nther
ealwor
ldexpect
edut
il
it
ytheor
ydoesnot
r
eal
l
yappl
i
ed,t
her
efor
eit
smanycr
it
iquesandal
ter
nat
iveappr
oaches.Second,peopl
e
t
endt
ogi
veanext
rav
aluet
otot
alabsenceof
 r
isk 
ont
hecont
rar
ytor
emot
eandhi
ghl
y
uncer
tai
nri
sk.Thi
rdandl
ast
,whent
hedi
ff
erencesi
npr
obabi
l
iti
esar
ever
ysmal
l
,peopl
e
t
endt
oignor
ethem andt
heexpect
edut
il
it
yist
heal
ter
nat
ive.

2.Expect
edUt
il
it
yTheor
y:-

EXPECTEDUTI
LITY:
-

Expect
edut
il
it
yisaneconomi
cter
m summar
izi
ngt
he 
uti
l
ity
 thatanent
it
yor
aggr
egat
eeconomyi
sexpect
edt
oreachunderanynumberofci
rcumst
ances.The
expect
edut
il
it
yiscal
cul
atedbyt
aki
ngt
he 
wei
ght
edav
erage 
ofal
lpossi
bleout
comes
undercer
tai
nci
rcumst
ances,wi
tht
hewei
ght
sbei
ngassi
gnedbyt
hel
i
kel
i
hood,or
pr
obabi
l
ity
,thatanypar
ti
cul
arev
entwi
l
loccur
.

The expect
ed ut
il
it
ytheor
ydeal
s wi
tht
he anal
ysi
s ofsi
tuat
ions wher
e
i
ndi
vi
dual
smustmakeadeci
sionwi
thoutknowi
ngwhi
chout
comesmayr
esul
tfr
om
t
hatdeci
sion,t
hisi
s,deci
sionmaki
ngunder
 uncer
tai
nty
.Thesei
ndi
vi
dual
swi
l
lchoose
t
heactt
hatwi
l
lresul
tint
hehi
ghestexpect
edut
il
it
y,bei
ngt
hist
hesum oft
hepr
oduct
s
ofpr
obabi
l
it ut
yand  i
l
ity
 ov
eral
lpossi
bleout
comes.Thedeci
sionmadewi
l
lal
sodepend
ont
heagent
’ r
s i
skav
ersi
on 
andt
heut
il
it
yofot
heragent
s.

Thebaseoft
het
heor
yar
elot
ter
ies,orgambl
es,(
Ln)eachonedef
inedbyal
lpossi
ble
out
comesorconsequences(
C1,
C2,
…,Cn)andt
hei
rcor
respondi
ngpr
obabi
l
iti
es(
p1,
p2,
…,pi,
wi
th∑pi=1)
. 
 EU(
L)=U(
c2)
p1 
+U(
c2)
p2 
+…+U(
cn)
pn

Thet
er expect
m  edut
il
it
y wasf
ir
sti
ntr
oducedby
 Dani
elBer
noul
l
i 
whousedi
tto
sol
vet St
he  .Pet
ersbur
gpar
adox,ast
heexpect
edv
aluewasnotsuf
fi
cientf
ori
ts
r
esol
uti
on. 
Howev
erJohnv
,
  onNeumann  OskarMor
and  genst
ern,i
nthei
rbook“
Theor
y
ofGamesandEconomi
cBehav
ior
”,1944,
consi
der
edt
hecor
ner
stoneofexpect
edut
il
it
y
t
heor
y,pr
ovi
dedgr
eatcont
ri
but
ionsandbui
l
tamat
hemat
icalf
oundat
ionf
orBer
noul
l
i’
s
sol
uti
onoft
hepar
adox
.Theydev
elopedasetofaxi
omsf
ort pr
he  ef
erent
ialr
elat
ions 
i
n
or
dert
oguar
ant
eet
hatt
heut
il
it
yfunct
ioni
swel
l
-behav
ed:

1.Axi
omsofor
der
:

Compl
etenessL0 L1 
orL1 L0 orL0∿L1

Ref
lexi
veL0 L0

Tr
ansi
ti
veL0 L1;
L1 L2 ↔ L0 L2

2.Cont
inui
ty:

L0 L1;
L1 L2

Wi
thp∊[
0,1]sot
hatL1∿pL0+(
1-p)
L2

3.Rat
ional
i
ty:

I
nor
dert
omaxi
mizer
esul
ts,
thehi
ghestpr
obabi
l
itywi
l
l cet
bechosen( eri
spar
ibus)

4.Rat
ional
Equi
val
ence:

Agent
swi
l
lev
aluat
erat
ional
l
ythepr
obabi
l
iti
esoft
hedi
ff
erentr
esul
ts

5.I
ndependence(
sur
ethi
ngpr
inci
ple)
:

I
fL0 L1 → *
L0+ 
(1-β)
*L2 β*
L1 
+(1-β)
*L2
3.Pr
ospectTheor
y:-

Def
ini
ti
on:
-
Pr
ospectt
heor
y i
sabehav
ior
aleconomi
c t
heor
ythatdescr
ibes
t
hewaypeopl
echoosebet
weenpr
obabi
l
ist
ical
ter
nat
ivest
hati
nvol
ver
isk,wher
ethe
pr
obabi
l
iti
esofout
comesar
eknown..
..Thepaper"
ProspectTheor
y:AnAnal
ysi
sof
Deci
sionunderRi
sk"(
1979)hasbeencal
l
eda"
semi
nal
paperi
nbehav
ior
aleconomi
cs"
.

Thepr
ospectt
heor
ywaspr
oposedbypsy
chol
ogi
stsDani
elKahneman
andAmosTv
erskyi
n1979,
andl
ateri
n2002Kahnemanwasawar
dedt
heNobelPr
izei
n
economi
csf
ori
t.(
Sadl
y,Tv
erskyhaddi
edwhent
hepr
izewasawar
ded.
)

Oneoft
hebi
asest
hatpeopl
erel
yonwhent
heymakedeci
sionsi
s l
oss
av
ersi
on:l
i
ke i
nthe i
nsur
ance exampl
e abov
e,t
hey t
end t
o ov
erwei
ght smal
l
pr
obabi
l
iti
est
oguar
dagai
nstl
osses.Ev
ent
hought
hel
i
kel
i
hoodofacost
lyev
entmay
bemi
niscul
e,wewoul
drat
heragr
eet
o asmal
l
er,sur
eloss— i
nthef
orm ofan
i
nsur
ancepay
ment— t
hanr
iskal
ar per
geexpense.The  cei
ved 
l
ikel
i
hoodofamaj
or
heal
thpr
obl
em i
sgr
eat
ert
hant act
he  ual
 
probabi
l
ityofsuchanev
entact
ual
l
yoccur
ri
ng.

Prospectt
heor
yexpl
ainst
hebi
asest
hatpeopl
eusewhent
heymakesuch
decisi
ons:
 Cert
ainty
 Isol
ati
oneff
ect
 Lossaversi
on

Cer
tai
nty
:-

Peopl
etendt
o ov
erwei
ghopt
ionst
hatar
ecer
tai
n,andar
eri
skav
ersef
or
gai
ns.Wewoul
drat
hergetanassur
ed,
lesserwi
nthant
aket
hechanceatwi
nni
ngmor
e
(
butal
sor
iskpossi
blyget
ti
ngnot
hing)
.Theopposi
tei
str
uewhendeal
i
ngwi
thcer
tai
n
l
osses:
peopl
eengagei
nri
sk-
seeki
ngbehav
iort
oav
oidabi
ggerl
oss.

Toper
suadeuser
stot
akeanact
ion,consi
derusi
ngt
hecer
tai
ntybi
ast
oyour
adv
ant
age:
 
peopl
ewoul
drat
heracceptasmal
lbutcer
tai
nrewar
dov
eramer
echanceat
al
argergai
n.I
fyouof
ferar
ewar
dforuser
swhowr
it
eapr
oductr
evi
ew,f
orexampl
e,
consi
dergi
vi
ngal
lrev
iewer
sacouponf
or10%t
hei
rnextpur
chase.

I
sol
ati
onEf
fect
:-
Thei
sol
ati
onef
fectr
efer
stopeopl
e’
stendencyt
o di
sregar
danyel
ement
s
t
hatar
ecommont
obot
hopt
ions,
inanef
for
ttosi
mpl
i
fyandf
ocusonwhatdi
ff
ers.

Remember
ingal
lthedet
ail
sofeachi
ndi
vi
dualopt
ioncr
eat
est
oomuchof
a 
cogni
ti
vel
oad,soi
tonl
ymakessenset
o f
ocusont
hedi
ff
erent
iat
ors.Di
scar
ding
commonel
ement
slessenst
hebur
denofcompar
ingal
ter
nat
ives,butcanal
sol
eadt
o
i
nconsi
stentchoi
cesdependi
ngonhowal
ter
nat
ivesar
epr
esent
ed.

Dani
elKahnemanandAmosTv
erskypr
esent
edpar
ti
cipant
swi
th2scenar
ios.
I
nbot
hscenar
iospeopl
ewer
egi
venani
nit
ialamountofmoney
,andt
henhadt
ochoose
bet
weent
woal
ter
nat
ives.

Scenar
io1:
Par
ti
cipant
sst
art
edwi
th$1000.Theyt
hencoul
dchoosebet
ween:

A.Wi
nni
ng$1000wi
tha50%pr
obabi
l
ity(
andwi
nni
ng$0wi
tha50%pr
obabi
l
ity
),or
B.Get
ti
nganot
her$500f
orsur
e.

Scenar
io2:
 Par
ti
ci
pant
sst
art
edwi
th$2000.Theyt
hencoul
dchoosebet
ween:

C.Losi
ng$1000wi
tha50%pr
obabi
l
ity(
andl
osi
ng$0wi
tha50%pr
obabi
l
ity
),or
D.Losi
ng$500f
orsur
e.

LossAv
ersi
on:
-
Mostpeopl
ewi
l
lbehav
esot
hatt
heymi
nimi
zel
ossesbecause 
l
ossesl
oom
l
argert
hangai
ns,
 
event
hought
hepr
obabi
l
ityoft
hosel
ossesi
sti
ny.
 Thepai
nofl
osi
ng
al
soexpl
ainswhy
,whengambl
i
ng,wi
nni
ng$100andt
henl
osi
ng$80f
eel
sli
keanet
l
ossev
ent
houghy
ouar
eact
ual
l
yaheadby$20.Peopl
e’
sreact
iont
olossi
smor
e
ext
remet
hant
hei
rreact
iont
ogai
n.(
Theor
derher
eisal
soi
mpor
tant—wer
ewet
ofi
rst
l
ose$80,t
hencomebackandwi
n$100,i
twoul
dshi
ftourr
efer
encepoi
ntandmakei
t
f
eel
li
keanetgai
n!)
 Thei
nfor
mat
ioni
ncl
udedonwebsi
tescanpl
ayi
ntopeopl
e’
sbi
asesi
nor
dert
o
per
suadet
hem t
omakeapur
chaseorsomeot
herdeci
sion.Forexampl
e,i
nsur
ance
websi
tesf
requent
lydi
spl
ayal
ongl
i
stofunl
i
kel
y,y
etcost
lyout
comest
hatwemay
encount
ershoul
dwenotbuyi
nsur
ance.Thi
sli
stpr
imesust
owar
dav
oidi
ngt
hesel
arge
l
ossesandmakesusf
orgetaboutt
hesmal
l
,butr
egul
arpay
mentt
hatwewoul
dmake
i
ndef
ini
tel
yforensur
ingi
nsur
ancecov
erage.

4.Gr
oupBehav
ior
:-

I
nanor
gani
zat
ionalcont
ext
,gr
oupt
hinkandgr
oupbehav
iorar
eimpor
tant
concept
sast
heydet
ermi
net
hecohesi
venessandcoher
enceoft
heor
gani
zat
ional
cul
tur
e and or
gani
zat
ionalcommuni
cat
ion.Fori
nst
ance,unl
ess t
he HRD f
unct
ion
communi
cat
est
hepol
i
ciescl
ear
lyandcogent
ly,t
heempl
oyeeswoul
dnotpar
ti
cipat
e
andcompl
ywi
tht
hem whol
ehear
tedl
y.Hence,mol
dinggr
oupbehav
iori
simpor
tantf
or
or
gani
zat
ions.Howev
er,t
hiscannotbeconst
ruedt
omeant
hatal
lempl
oyeesmust
t
hinkandactal
i
ke.Ont
hecont
rar
y,i
nnov
ati
oncannothappenwhengr
oupbehav
iori
s
t
hesameacr
ossal
llev
els.Thepoi
nther
eist
hatwhi
l
eor
gani
zat
ionsmustst
ri
vef
or
cohesi
veness and coher
ence,t
heymustnotsacr
if
ice t
he pr
inci
ples ofi
ndi
vi
dual
cr
eat
ivi
tyandbr
il
li
ancet
hatar
eatt
hehear
tofor
gani
zat
ionalchangeandi
nnov
ati
on.I
n
t
heset
urbul
entt
imes,t
her
eisaneedf
ori
ndi
vi
dual
stot
akeast
andandbef
ir
m ont
he
di
rect
iont
hatt
heor
gani
zat
ionseekst
otake.

Gr
oupbehav
iorneedst
obei
ncul
cat
edi
nor
gani
zat
ionsf
ort
hesi
mpl
e
r
eason t
hatempl
oyees mustconf
orm t
othe r
ules and r
egul
ati
ons t
hatgov
ern
or
gani
zat
ions.Hence,t
her
eis a need f
oruni
for
mit
yand consi
stencyi
nthe way
or
gani
zat
ionalgr
oupbehav
iorhast
obemol
ded.Towar
dst
hisend,gr
oupt
hinkand
gr
oup behav
iormustbeencour
aged byt
heHRD f
unct
ion asa meanst
o ensur
e
cohesi
venessi
ntheor
gani
zat
ion.
 I
nthet
echnol
ogysect
or,weof
tenf
indempl
oyeesst
rai
ghtoutofcampuses
behav
ing ast
hough t
heyar
est
il
lin col
l
ege.Whi
l
esomeoft
hisf
reet
hinki
ng and
f
reewheel
i
ngspi
ri
tisgoodf
ori
nnov
ati
on,t
heHRD f
unct
ionmustguar
dagai
nstt
he
t
endency t
o be f
li
ppantwi
tht
he or
gani
zat
ionalr
ules and pr
ocedur
es.Fur
ther
,
compet
it
iveness can be encour
aged buti
tshoul
d notcome att
he expense of
col
l
abor
ati
onandcooper
ati
ont
hatar
eatt
hehear
tofor
gani
zat
ional
success.

Gr
oupbehav
iorcanbedet
ri
ment
alt
otheor
gani
zat
ionalheal
thaswel
l
.Thi
s
happenswhent
hedeci
sionsoft
het
opmanagementar
enotchal
l
engedorar
efol
l
owed
bl
i
ndl
yleadi
ngt
othel
eader
shi
pthi
nki
ngt
hatwhat
evert
heydoi
sri
ght
.Wedonotmean
t
osayt
hatt
her
emustbef
ract
iousf
ight
sint
heor
gani
zat
ion.Ont
heot
herhand,t
her
e
mustbeaspacef
orf
reeexpr
essi
on ofi
deasand t
hought
sand t
ruedemocr
ati
c
deci
si
onmaki
ngoughtt
otakepl
ace.Onl
ywhenor
gani
zat
ionsi
ncul
cat
etheseel
ement
s
i
nthei
rDNA cant
heysucceedi
nthecompet
it
ivebusi
nessl
andscapeoft
he21st
cent
ury
.

Fi
nal
l
y,gr
oupt
hinkcanbeapower
fulmot
ivat
oraswel
lasi
nhi
bit
or.The
mot
ivat
ingaspecthappenswhenbecauseofgr
oupt
hink;empl
oyeesf
eelbondi
ngwi
th
t
hei
rpeer
sandcol
l
eaguesandhenceensur
ethatt
heygi
vet
hei
rbestt
othej
ob.The
i
nhi
bit
orwor
kswhenempl
oyeesf
eelt
hatt
hei
rindi
vi
dualcr
eat
ivi
tyandbr
il
li
ancear
e
bei
ngsacr
if
icedatt
heal
tarofconf
ormi
ty.Hence,t
hel
eader
shi
paswel
last
heHRD
f
unct
ionhast
hei
rtaskcutoutt
oensur
ethatgr
oupbehav
iordoesmor
egoodt
hanhar
m.
Ther
eisaneedf
oranuancedandbal
ancedappr
oacht
owar
dsgr
oupbehav
iort
o
l
ever
aget
hei
ndi
vi
dualcr
eat
ivi
tyandatt
hesamet
imenotsacr
if
iceor
gani
zat
ional
cohesi
venessandcoher
ence.