1.2 Rationale of Study and Gaps in Existing
Research
Although there are numerous conceptual evidence on the
validity of classical financial theories such as the CAPM, MPT and EMH, in
trying to provide insights and explanations to the general idea of the
investment decision-making process, there is a need for reviewing the existing
literature revealing that very little attention is being given to the
behavioural aspects influencing the entire process. The classical finance
school of thought seeks in portraying investment decision-making processes as
processes which can be studied and applied properly in real life. With
investors bearing this in mind, they will be allowed to be able to predict as
well as beat the market hence the issue of human error and irrationality will
not arise.
On the other hand, behavioural finance has proven to have
very strong implications especially when seeking to provide cover for the
lacuna done by the classical finance school of thought when trying to stress on
the investment decision-making process. Behavioural finance researchers try in
providing detailed explanations for the existence of irrationality and human
errors as far as investment decision-making are concerned so as to reduce risk
if it cannot be avoided. It is evident that the behavioural finance scholars
always try to stress on the fact that in order not to avoid any investment
mistakes caused by human beings, then the practitioners (financial) should
always try to understand the factors of finance brought out by the behavioural
finance scholars. This is because these scholars try to provide an adequate
understanding of the application of socio-psychological factors in the
investment decision-making processes. This can successfully be done by looking
at the way individual investors are influenced by certain cognitive illusions
especially as they try to arrive at a decision. As these behavioural finance
scholars struggle to provide an adequate understanding into the investment
decision-making processes, they have as well failed to look at the proposed
sociopsychological factors in details alongside with the classical finance
scholars thereby resulting in a gap in the entire investment decision-making
processes which therefore calls for concern.
Nevertheless, it has been argued that the theories of
classical finance such as CAPM are based on many assumptions some of which are
obviously unrealistic?.... «The true test of a
model lies not just in the reasonableness of its underlying assumptions but
also in the validity and usefulness of the model?s prescription. Tolerance of
CAPM?s assumptions, however fanciful, allows the derivation of a concrete,
though idealized, model of the manner in which financial markets measure risk
and transform it into expected return.» (Mullins, 1982).
This then implies that such important classical finance
theories should never be underestimated or disregarded when trying to provide
explanations for other factors influencing investment decision-making
process.
Judging from the above mentioned points, it can be concluded
that the main reason of this research is filling that gap left by the financial
researchers by way of critically analysing the process of investment
decision-making. That is finding out if the different financial scholars'
factors have been assimilated by other different scholars influencing the
decision-making process. This therefore leaves us with the question of
determining the extent to which the behavioural as well as the classical
factors influence the investment decision-making processes thereby giving room
to actually understand the domain of finance and investment and how the
investment process works as a whole.
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