IN Y.O.U.R O.W.N WORDS,

1.) Differentiate Macro and Micro Behavioral Finance

2.) Differentiate Standard Finance and Behavioral Finance

3.) Explain and differentiate Rational Economic Man and Behaviorally Biased Man.

NOTE: Must be your own words. Don't p.la.g.ia.rize. Must be atleast five sentences.

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You can get an idea from this module:

1. Micro Behavioural Finance (BFMI): This branch deals with the behaviour of individual investors. In BFMI, we compare irrational investors to rational investors, as observed in the rational/classical economic theory. These rational investors are also known as "homo economicus" or the rational economic man.

2. Macro Behavioural Finance (BFMA): Unlike micro behavioural finance (BFMI), which deals with the behaviour of individuals, macro behavioural finance deals with the drawbacks of the efficient market hypothesis. Efficient market hypothesis is one of the models in conventional finance that helps us understand the trend of financial markets. Macro behavioural finance also addresses the limitations of Portfolio Principles of Markowitz, the Capital Asset Pricing Model (CAPM), Theory of Sharpe, Linter, Black and the Option- Pricing Theory of Black, Scholes and Merton.

The key difference between "Traditional Finance" and "Behavioural Finance" are as follows:

Traditional finance assumes that people process data appropriately and correctly. In contrast, behavioural finance recognises that people employ imperfect rules of thumb (heuristics) to process data which induces biases in their belief and predisposes them to commit errors.

Traditional finance presupposes that people view all decision through the transparent and objective lens of risk and return. Put differently, the form (or frame) used to describe a problem is inconsequential. In contrast, behavioural finance postulates that perceptions of risk and return are significantly influenced by how decision problem isframed. In other words, behavioural finance assumes frame dependence.

Traditional finance assumes that people are guided by reasons and logic and independent judgment. While, behavioral finance, recognizes that emotions and herd instincts play an important role in influencing decisions.

Traditional finance argues that markets are efficient, implying that the price of each security is an unbiased estimate of its intrinsic value. In contrast, behavioural finance contends that heuristic-driven biases and errors, frame dependence, and effects emotions and social influence often lead to discrepancy between market price and fundamental value.

Traditional finance views that price follow random walk, though prices fluctuateto extremes, they are brought back to equilibrium in time. While behavioural finance views that prices are pushed by investors to unsustainable levels in both directions. Investor optimists aredisappointed and pessimists are surprised. Stock prices are future estimates, a forecast of what investors expect tomorrow's price to be, rather than an estimate of the present value of future payment streams.