BEHAVIOURAL FINANCEGROUP ASSIGNMENTSubmitted by:Avinash Gangwani – 80012020011Shivam Agarwal – 80012020065Subiksha S - 80012020066
Question 1:Listening to Ruchir Sharma’s speech on CNBC, what kind of investor would you callhim and why? Write in two hundred words with justifications.Answer:We can classify Ruchir Sharma as an independent investor. An independent investor is onewho is actively involved in the financial markets and has a well planned investment strategy.Ruchir Sharma, in his speech on CNBC divides his presentation in two parts. In the first part,he talks about the tactical view for one year. In the second part, he discusses about thestrategic view for a slightly longer time period of 3 years. He strongly condemns the futureprojections made for a time period of longer than 3 years and strongly believes that theoptimum time horizon for investments are a maximum of 3 years.An independent investor puts great emphasis on analysis and critical thinking. It wasobserved that all the investment decisions were on the basis of comprehensive analysis ofcurrent economic conditions of emerging and developed economies. He carried out a criticalanalysis of correlation between commodity pricing and movement of stocks in the U.S.equity market post strict monitoring of investments in commodity markets by the FED. Thisbehaviour of Ruchir Sharma, made him understand that there will be a bullish stock marketonly when there is a bearish commodity market.Analysis of Global Financial cues allowed Ruchir and his team to make critical assumptionsto predict market growth in developing economies. It was evident when he was asked aboutIndia’s performance when there was already a contraction of 15% and market contractions inthe third year, to which he replied that India’s performance has been consistent in last threemonths, positive long term performance of India. He also recommends to absorb excessliquidity to reduce oil prices ($60-$80), but this could cause other problems. This statestheoretical behaviour of independent investors, critically analysing investment opportunitywhere wealth can be accumulated and would generate leading indicators.Independent investors identify and mitigate their exposure to risk and are loss averse. Thisbehaviour was also observed in Ruchir Sharma when he mentioned that as he expectedcontraction of Indian and Indonesian markets, he was reducing his investments in thesemarkets.
Question 2:What kind of behavioural biases does Ruchir Sharma exhibit in his view of the marketin general? Explain, Why?Answer:Based on the speech by Ruchir Sharma following behavioural biases can be identified to beexhibited by him:Representative Bias:Representativeness Heuristic bias occurs when people's reasoningabout the probability of an outcome is muddled by the similarity of things or events. It maybe attributed to the 2007-2008 crisis. We can see that Sharma is sceptical about the bullmarket due to the “too big to fail” idea which was also a cause for the 2007-2008 financialcrisis. Also his views on emerging markets and developed markets can be seen asrepresentative bias as he does not bring out sufficient information to back the statements.Ambiguity Aversion Bias:The revised portfolio as per Sharma’s statement is reducedweightage to cyclical sectors and reduced their exposure to markets like India and Indonesia.These markets were deemed problematic due to less consumption, continuous inflation andnot such a strong currency. It seemed like Ruchir wanted to avoid such ambiguous andvolatile markets. It means that he is unwilling to invest in the markets that had no solidpattern of performance because India was giving steady returns but had low consumption andprevalent inflation. He has efficiently revised the portfolio in order to reduce thelosses/exposure.Contrast Bias:The contrast effect is the growth or fading perception as a result of priorexposure to something of lower or higher quality. Contrast bias can be seen through the effectof the 2007-2008 financial crisis on the investment pattern and portfolio of Sharma. Thismakes him very cautious and risk averse towards risky investments.Loss Aversion Bias:Loss aversion is the inclination towards avoiding losses to acquiringequivalent gains. Here, the investors try to focus on avoiding losses rather than making gainsand achieve break even. This is evident from Sharma’s revised portfolio. The revisedportfolio gets rid of risky investments in order to avoid any further exposure. He believes theafter effects of the 2007-2008 crisis are still present in the market and such similar trends canbe seen in the market. This makes him sceptical about the market volatility and makes a safebet by sticking to the current portfolio and not making any risky investments in markets likeIndia, Indonesia and China.
Question 3:According to Ruchir’s view what was the valuation of Indian market? Please elaborate
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