Behavioural Finance Assignment Group 3.docx - BEHAVIOURAL...

BEHAVIOURAL FINANCE
GROUP ASSIGNMENT
Submitted by:
Avinash Gangwani – 80012020011
Shivam Agarwal – 80012020065
Subiksha S - 80012020066

Question 1:
Listening to Ruchir Sharma’s speech on CNBC, what kind of investor would you call
him and why? Write in two hundred words with justifications.
Answer:
We can classify Ruchir Sharma as an independent investor. An independent investor is one
who 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 the
strategic view for a slightly longer time period of 3 years. He strongly condemns the future
projections made for a time period of longer than 3 years and strongly believes that the
optimum time horizon for investments are a maximum of 3 years.
An independent investor puts great emphasis on analysis and critical thinking. It was
observed that all the investment decisions were on the basis of comprehensive analysis of
current economic conditions of emerging and developed economies. He carried out a critical
analysis 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. This
behaviour of Ruchir Sharma, made him understand that there will be a bullish stock market
only when there is a bearish commodity market.
Analysis of Global Financial cues allowed Ruchir and his team to make critical assumptions
to predict market growth in developing economies. It was evident when he was asked about
India’s performance when there was already a contraction of 15% and market contractions in
the third year, to which he replied that India’s performance has been consistent in last three
months, positive long term performance of India. He also recommends to absorb excess
liquidity to reduce oil prices ($60-$80), but this could cause other problems. This states
theoretical behaviour of independent investors, critically analysing investment opportunity
where wealth can be accumulated and would generate leading indicators.
Independent investors identify and mitigate their exposure to risk and are loss averse. This
behaviour was also observed in Ruchir Sharma when he mentioned that as he expected
contraction of Indian and Indonesian markets, he was reducing his investments in these
markets.

Question 2:
What kind of behavioural biases does Ruchir Sharma exhibit in his view of the market
in general? Explain, Why?
Answer:
Based on the speech by Ruchir Sharma following behavioural biases can be identified to be
exhibited by him:
Representative Bias: Representativeness Heuristic bias occurs when people's reasoning
about the probability of an outcome is muddled by the similarity of things or events. It may
be attributed to the 2007-2008 crisis. We can see that Sharma is sceptical about the bull
market due to the “too big to fail” idea which was also a cause for the 2007-2008 financial
crisis. Also his views on emerging markets and developed markets can be seen as
representative 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 reduced
weightage to cyclical sectors and reduced their exposure to markets like India and Indonesia.
These markets were deemed problematic due to less consumption, continuous inflation and
not such a strong currency. It seemed like Ruchir wanted to avoid such ambiguous and
volatile markets. It means that he is unwilling to invest in the markets that had no solid
pattern of performance because India was giving steady returns but had low consumption and
prevalent inflation. He has efficiently revised the portfolio in order to reduce the
losses/exposure.
Contrast Bias: The contrast effect is the growth or fading perception as a result of prior
exposure to something of lower or higher quality. Contrast bias can be seen through the effect
of the 2007-2008 financial crisis on the investment pattern and portfolio of Sharma. This
makes him very cautious and risk averse towards risky investments.
Loss Aversion Bias: Loss aversion is the inclination towards avoiding losses to acquiring
equivalent gains. Here, the investors try to focus on avoiding losses rather than making gains
and achieve break even. This is evident from Sharma’s revised portfolio. The revised
portfolio gets rid of risky investments in order to avoid any further exposure. He believes the
after effects of the 2007-2008 crisis are still present in the market and such similar trends can
be seen in the market. This makes him sceptical about the market volatility and makes a safe
bet by sticking to the current portfolio and not making any risky investments in markets like
India, Indonesia and China.

Question 3:
According to Ruchir’s view what was the valuation of Indian market? Please elaborate