3.3 Research Approach
Reading from Saunders et al, 2007, it is evident that the
general research approach adopted just for study purposes is based mainly on
the philosophical stance which is adopted for the research with the
deductive approach normally based on positivism and the
inductive approach on interpretivism. Contrary to the
deductive approach which focuses on the formulation of the hypotheses
and the use of statistical methods in the data analysis process, the
inductive approach helps in establishing links between the research
objectives as well as assisting in the production of reliable and valid
findings. Note that the deductive approach will be used in presenting
the findings and conclusions.
3.4 Choice of Method
According to Trow, 1957, the application of the philosophical
assumptions of positivism and interpretivism to this study is
an indication that this study took a pluralist methodological stance. This is
so because this study focuses on understanding, interpreting, describing and
explaining how financial regulations, risk management and value creation
influence investment decision-making combine with some socio-psychological
factors.
For the purpose of this study, we will be using the
secondary and tertiary methods of data collection. Reading
from Saunders et al, 2003, secondary data is a form of data that has
been collected for use for other purpose(s) but can still be used in answering
the designed research questions. In other words, these are can be referred to
as ready-made materials. These are often used in providing foundations for
present day studies by helping in the investigation and provision of some
already existing theories in classical and behavioural finance that relate to
the study. While secondary data is mostly gotten from textbooks,
newspapers, journals and magazines, tertiary data is gotten from the
internet and encyclopaedias.
CHAPTER FOUR
ANALYSIS AND DISCUSSION OF FINDINGS
4.1 Purpose of the Chapter
This chapter will focus on the presentation of the results
obtained from the findings. These results will be analysed by bringing out the
difference between the classical and behavioural schools of finance as well as
testing the hypotheses. Also, within the content of this section, we will be
explaining how the concept of behavioural finance best explains and contributes
to the outbreak of the present global crisis. Note that the analysis and
results are dependent upon the findings of this study. In this chapter, the
results of the findings will be described and presented.
4.2 Description of Findings-Classical Finance Vs
Behavioural Finance
Statistics has proven that risk plays a very important role in
investment no doubt it is considered to be a very important topic in
investment. This is because an understanding of risk and how it is measured is
cardinal to the development of investment strategies and the subsequent making
of investment decisions. As pointed out by Blume (1971), risk constitutes a
controversy amongst different financial theories which can all be classified
under the classical and behavioural schools of finance. Based on these
differences, this section of the study will be responsible for the on going
debate on the existing views of the risk concept.
Levy and Sarnat (1972) stress on the fact that some already
existing classical financial theories such as the CAPM, MPT and EMH are all
moving towards the direction of risk being a uni-dimensional concept since its
measurement is so purely objective. Based on this, they try in providing very
basic description of the classical finance school of thought's approach towards
risk as follows:
«Subsequently, various economists have tried to
evaluate investments with the aid of two (or more) indicators based on the
distribution of returns. Generally one index reflects the profitability of the
investment while the other is based on the dispersion of the distribution of
returns and reflects the investment?s risk. The most common profitability index
used is the expected return that is the mean of the probability distribution of
returns; the risk index is usually based on the variance of the distribution,
its range and so on». (p.303)
Following what Levy and Sarnat mentioned above, it is evident
that risk has to do with; the standard deviation where by the volatility of the
return can be measured with the beta coefficient responsible for comparing the
volatility of the different security and portfolio within the market with that
of the market as a whole. Risk is most often than not evaluated following the
different variations of returns of an investment with reference to its expected
return, hence confirming the fact that risk is a double sided coin. The main
reason behind risk centres on the fact that risky investments stand better
chances of higher expected returns unlike a risk-free investment. This is
because it is assumed that during decision-making, investors try to make
decisions with possible outcome being associated with specific expected
return.
As such, there are two categories of risks as far as the
classical financial theories are concern-systematic risk also known as
non-diversifiable risk, is the risk type that can not be eliminated hence it is
associated with the entire market. On the other hand, we have the
unsystematic risk which is entirely associated with particular
companies, thereby making this risk type unique and diversifiable (Bodie et al,
2008).
Within the content of the classical financial investment
decision theories, it is assumed that individual investors behave in a rational
manner and make optimal decisions when confronted with judgements regarding
risk and uncertainty.
In addition to the above, this research equally revealed the
fact the behavioural finance scholars just as the name `behavioural' try to
provide an absolute understanding of the behaviour of investors in general. As
a result, they look into the general idea on risk and investment from all
fields of life no doubt it is mostly referred to as an interdisciplinary field
which developed from all subjects in life be it sociology, psychology, finance
as well as behavioural economics hence greatly influencing some investment
decisions.
This boils down to the fact that behavioural finance, unlike
classical finance, takes a completely radical view when it comes to the subject
of decision-making. As if that is not enough, behavioural finance researchers
claim that investors do not need to always seek the highest return for a given
level of risk at any given point in time as assumed by MPT.
In the course of our study, it was realised that unlike the
classical financial school of thought, the behavioural financial school of
thought views the decision-making process to be a rationality bounded process.
This is fully supported by Bajeux-Besnainou and Ogunc, 2003 when they stated
that:
«Satisficing? is an optimization methodology that
involves emotions, adaptive learning and cognitive biases. Simon calls for
individuals to satisfice?, that is, to optimize until it is close
enough in the traditional sense of optimization. By contrast, the traditional
way of optimizing is a maximization of a utility function subject to budget
constraints, as in the classic economics framework». (p.119)
Contrary to the views of classical finance, with behavioural
finance, it is assumed that an important aspect in investment decision-making
process is subjective to aspects perceived by risk investors. No doubt they
look at risk to be multidimensional unlike it being unidimensional therefore
implying a blend of accounting and financial variables. Looking at risk at a
greater in-depth, it has revealed that individual attitudes towards risk are
far from being
Other Factors:
Investment
Decision-Making
Financial Regulations
Risk Management
Value Creation
logical. This is so because in real day to day decision-making
situation, people are faced with the need to address risk in situations that
they have never come across and which they might never encounter thereafter,
thus the reliance on statistical techniques is sometimes largely irrelevant and
can hardly have any impact on their decisions. As a result, behavioural finance
stands a better chance of providing very convincing explanations for the causes
of the global financial crisis.
All in all, through out our study, we realised that everything
on the investment decision-making process centred on these two schools of
finance. Both schools stressed on the fact that some aspect of risk needs to be
taken in order to expect any form of return, therefore investors need to take
on to the risk in order to create an expected return.
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