Capital structure construct: a new approach to behavioral finance

Within the framework of behavioral finance, this research shows that financial behavior can be assessed as a cognitive construct. Using certain variables, a multidimensional “cognitive finance” construct can thus be established. Through a technological – psychometric type design with descriptive data analysis, a factor analysis is presented to determine which latent variables tend to charge significantly in order to assess the validity of the dimensions comprising the construct of capital structure and explore its dimensions in relation to financial theory. A 44-item questionnaire is adapted and applied to a sample of chief financial officers from diverse public and nonpublic companies in Mexico. The analysis reveals the existence of four construct dimensions consistent with corporate financial theory. The model helps to explain how decision-makers react to uncertainty and environmental conditions, directly affecting the valuation of firm’s losses or earnings. As evidenced by the results, application of the Item Response Theory to the field of behavioral finance could open up new avenues to the study of cognitive biases, involved in the financial decision-making process. Thus, this implies that behavioral finance can also be treated as “cognitive finance.”

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Financial Behavior

10.1093/acprof:oso/9780190269999.001.0001 ◽

2017 ◽

Cited By ~ 2

Keyword(s):

Financial Markets ◽

Behavioral Finance ◽

Financial Services ◽

Well Being ◽

Decision Makers ◽

Financial Behavior ◽

Empirical Literature ◽

Rapid Pace ◽

Financial Decision ◽

User Friendly

This book provides a synthesis of the theoretical and empirical literature on the financial behavior of major stakeholders, financial services, investment products, and financial markets. It offers a different way of looking at financial and emotional well-being and the processing of beliefs, emotions, and behaviors related to money than provided by traditional academic finance. The book provides important insights into how cognitive and emotional biases influence various financial decision makers, services, products, and markets. Because noted scholars and practitioners write on their areas of expertise, readers can gain an in-depth understanding of multiple topic from experts around the world. In today’s financial setting, the discipline of behavioral finance continues to evolve at a rapid pace. This book familiarizes readers with not only the core topics and issues but also the latest trends, cutting-edge research developments, and real-world situations. Additionally, discussion of cognitive and emotional issues is supported with research in the field. Overall, the book covers a critical topic, from the theoretical to the practical, while offering a useful balance of detailed and user-friendly discussions. Those interested in a broad survey will benefit, as will those seeking in-depth coverage of biases and other aspect of behavioral finance. As the seventh book in the Financial Markets and Investment Series, Financial Behavior: Players, Services, Products, and Markets offers a fresh look at this fascinating area of behavioral finance.

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Heuristics as a new way of adjusting the end market value

Finance and Credit ◽

10.24891/fc.27.7.1581 ◽

2021 ◽

Vol 27 (7) ◽

pp. 1581-1599

Author(s):

Semen Yu. BOGATYREV

Keyword(s):

Behavioral Finance ◽

Market Value ◽

Measurement Methods ◽

Decision Makers ◽

Emotional Impact ◽

Psychological Measurement ◽

Survey Results ◽

Financial Decision ◽

The Cost

Subject. The study deals with heuristics as measures of the emotional impact of people who judge about the value and the final result of the valuation. I review ranges of the value variance when influenced by irrational factors. From psychological perspectives, some phenomena are explained with a set of heuristics that exist as part of behavioral finance. Objectives. Referring to the completed studies, I implement elements of behavioral finance, such as heuristics into the method for assessing how financial decision-makers and their emotions influence the value. Methods. The article is based on methods of induction and deduction to process survey results. Results. The article reveals the content of key methods for measuring emotions of financial decision-maker, which conclude on the value, being influenced by heuristics. I demonstrate tools for implementing psychological measurement methods as part of valuation. Conclusions and Relevance. Considering heuristics of value decision-makers, the appraiser and the cost analyst approximate the valuation result to the real conditions, when market actors are irrational. Doing so, they contribute to the quality of the result of appraisal. The findings are applicable to the practice of appraisers, cost analysts, fundamental analysts. Heuristics enrich and expands the classical apparatus of valuation and increases its quality.

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THE EFFECT OF COGNITIVE AND EMOTIONAL BIASES ON THE CAPITAL STRUCTURE DECISIONS: A LITERATURE REVIEW

EMC Review - Časopis za ekonomiju - APEIRON ◽

10.7251/emc1402286b ◽

2014 ◽

Vol 8 (2) ◽

Author(s):

Tekin Bilgehan ◽

Gor Yusuf

Keyword(s):

Decision Making ◽

Capital Structure ◽

Behavioral Finance ◽

Point Of View ◽

Decision Makers ◽

Empirical Literature ◽

Behavioral Characteristics ◽

Strategic Choices ◽

Emotional Process ◽

The Capital Structure

Each decision-making process is an important cognitive and emotional process which is open to the emotional effect. Individuals make a decision about a future uncertainty either to feel good or maximizing gain by minimizing the loss ratio. Recently, researches in finance have criticized that the capital structure decisions and firms’ funding and strategic choices deviate from the traditional neoclassical paradigm. Furthermore there is a nascent empirical literature that has exposed interesting evidence of the effects of managerial behavioral biases. Managers’ decisions, that to create the capital structure, have a vital importance for the company. The behavioral finance (BF) approach may be revealed useful results in the process of solving decision-makers’ behaviors and thoughts. In this context the purpose of this study is to reveal if the managers are affected by their behavioral characteristics in the process of the financing decision-making, based on the findings of studies in the literature. From this point of view behavioral finance literature, which is about the financing and capital structure decisions, is investigated. As a result, theoretical and empirical analyses, which discussed in the literature, show that managers’ biases play an important role in explaining the capital structure choice.

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Behavioral Finance

10.1093/wentk/9780190868741.001.0001 ◽

2019 ◽

Author(s):

H. Kent Baker ◽

Greg Filbeck ◽

John R. Nofsinger

Keyword(s):

Decision Making ◽

Behavioral Finance ◽

Social Factors ◽

Cognitive Biases ◽

Risk Tolerance ◽

Market Anomalies ◽

The World ◽

Financial Decision ◽

The Common ◽

And Gender

People tend to be penny wise and pound foolish and cry over spilt milk, even though we are taught to do neither. Focusing on the present at the expense of the future and basing decisions on lost value are two mistakes common to decision-making that are particularly costly in the world of finance. Behavioral Finance: What Everyone Needs to KnowR provides an overview of common shortcuts and mistakes people make in managing their finances. It covers the common cognitive biases or errors that occur when people are collecting, processing, and interpreting information. These include emotional biases and the influence of social factors, from culture to the behavior of one’s peers. These effects vary during one’s life, reflecting differences in due to age, experience, and gender. Among the questions to be addressed are: How did the financial crisis of 2007-2008 spur understanding human behavior? What are market anomalies and how do they relate to behavioral biases? What role does overconfidence play in financial decision- making? And how does getting older affect risk tolerance?

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How Behavioral Aspects Influence the Sustainable Financial Decisions of Shareholders: An Empirical Study and Proposal for a Relevant Decision-Making Concept

Sustainability ◽

10.3390/su12124813 ◽

2020 ◽

Vol 12 (12) ◽

pp. 4813

Author(s):

Mariana Sedliačiková ◽

Patrik Aláč ◽

Mária Moresová

Keyword(s):

Decision Making ◽

Behavioral Finance ◽

Financial Behavior ◽

Decision Making Process ◽

Financial Decision Making ◽

Emotional Factors ◽

Furniture Manufacturing ◽

Behavioral Aspects ◽

Financial Decision ◽

The Impact

Behavioral finance is an area or sub-discipline of behavioral economics that examines the real financial behavior and decision-making of people, including the knowledge of psychology and sociology. The objective of this paper was to identify and investigate the impact of significant cognitive, psychological and emotional factors affecting the financial decision-making of the shareholders of woodworking and furniture manufacturing and trading enterprises. This could lead to the design of decision-making concepts which take into account not only cognitive but also psychological and emotional factors and their influences on decision-making process, which could positively affect the sustainable development of the aforementioned types of enterprises. The mapping of the addressed issue was carried out by means of an empirical survey in the practice of the Slovak woodworking and furniture manufacturing and trading enterprises in the form of a questionnaire. The results of the survey were evaluated by descriptive, graphical and mathematical-statistical methods. Conclusions and recommendations were formulated based on the identification of key behavioral aspects (knowledge, security, freedom and sadness), the implementation of which could contribute to eliminating negative deviations and errors in the financial decision-making process of shareholders of woodworking and furniture manufacturing and trading enterprises.

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Financial Decision under Uncertainty: Lessons from Indonesian Millennial

Webology ◽

10.14704/web/v18si04/web18194 ◽

2021 ◽

Vol 18 (Special Issue 04) ◽

pp. 1223-1240

Author(s):

Diyan Lestari

Keyword(s):

Financial Literacy ◽

Perceived Risk ◽

Risk Mitigation ◽

Strong Relationship ◽

Decision Makers ◽

Financial Behavior ◽

Decision Under Uncertainty ◽

Financial Decision ◽

The Individual ◽

Critical Aspects

Financial decision under uncertain event is relatively tough not only for individual but also government and business owner. It impacts the individual welfare and other critical aspects. This paper attempts to examine millennial financial behavior in order to promote better understanding in facing uncertain event and conduct better risk mitigation. This study analyzed millennial financial decision by involving 2270 respondents. The result reveals that social influence, personality traits, financial literacy, and perceived risk provide strong relationship on millennial financial decision which present important implication for both academics and decision makers.

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Cognitive Biases as an Integral Part of Behavioral Finance

Economic Themes ◽

10.2478/ethemes-2020-0005 ◽

2020 ◽

Vol 58 (1) ◽

pp. 75-96

Author(s):

Milјan Leković

Keyword(s):

Qualitative Research ◽

Behavioral Finance ◽

Portfolio Management ◽

Cognitive Biases ◽

Decision Makers ◽

Complex World ◽

Small Companies ◽

Portfolio Strategy ◽

Qualitative Research Methodology ◽

Capital Value

AbstractThe complex world of finance is characterised by numerous irrationalities that representatives of behavioral finance seek to explain by cognitive biases (flaws, inclinations or anomalies). Cognitive biases represent imperfect perception of reality and are caused by limited cognitive capacities of decision-makers. By analysing cognitive biases, the paper aims to answer the following questions that standard finance fails: Why active portfolio strategy is still the most influential strategy in portfolio management despite the mounting evidence of unsuitability of its application? Why investors prefer dividend payout over increase in capital value (dividend puzzle)? Why investors ignore benefits of investment diversification and choose to invest in a small number of shares of well-known local businesses (diversification puzzle)? Why investors avoid to sell “loser” shares and thus reduce the tax burden? Why shares of small companies usually bring higher returns compared to shares of large companies? The answers to these questions are obtained by using qualitative research methodology, which also represents the main result of the research.

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New finance: Psychological measurement of value

Finance and Credit ◽

10.24891/fc.27.5.1156 ◽

2021 ◽

Vol 27 (5) ◽

pp. 1156-1177

Author(s):

Semen Yu. BOGATYREV

Keyword(s):

Behavioral Finance ◽

Decision Makers ◽

Market Volatility ◽

Psychological Measurement ◽

Emotional Factors ◽

Financial Decision ◽

Analytical Tools ◽

The Impact ◽

Psychological Concepts

Subject. The article addresses emotional factors that affect value under psychological concepts. It describes processes of obtaining information for surveys when measuring emotions, adjusting the evaluation tools, taking into account new analytical capabilities provided by the use of psychological measurement. Objectives. The study aims at creating a methodology to consider the impact of emotional factors that become apparent under the influence of psychological concepts, on value. Methods. I employ methods of induction and deduction in survey data processing. Results. The paper discloses the content of the main methods for recording emotions in the process of making a conclusion about the value by financial decision makers under the influence of psychological concepts. It demonstrates tools for implementing the methods of psychological measurement in valuation. The findings may be helpful in the work of modern appraisers and value analysts. It is especially important to use the tools for measuring emotions in conditions of digital economy, instability and crisis, a change in the market paradigm, distortion of traditional financial and economic indicators, market volatility. The use of psychological concepts complements and expands the classic assessment toolkit, improves the quality of valuation. Conclusions. The paper concludes on opportunities that financial analysts have, when applying new advances in behavioral finance and modern psychological studies. It outlines prospects for analytical tools development, using new indicators to enhance the efficiency of valuation results.

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