Financial decisions and financial markets

Financial decisions and financial markets.

Content

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  Fundamental Concepts.
  
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  Expected Utility Theory. Origins of Expected Utility Theory.
  
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  Axio-matic Definition. Which Utility Functions are “Suitable”?.
  
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  Measuring the Utility Function
  
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  Mean-Variance Theory .Definition and Fundamental Properties. Success and Limitation .
  
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  Prospect Theory Origins of Behavioral Decision Theory
  
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  Original Prospect Theory.
  
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  Cumulative Prospect Theory. Choice of Value and Weighting Function.
  
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  Continuity in Decision Theories.
  
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  Other Extensions of Prospect Theory. Connecting EUT , Mean Variance Theory and PT. Ambiguity and Uncertainty.
  
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  Time Discounting
  

Decision theory

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  prescriptive (rational) approach
  
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  descriptive (behavioral) approach
  

Types of decisions

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  1. Investment decisions • 2. Financing decisions • 3. Dividend decisions.
  

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  Investment Decisions:
  

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  Investment Decision relates to the determination of total amount of assets to be held in the firm, the composition of these assets and the business risk complexions of the firm as perceived by its investors. It is the most important financial decision. Since funds involve cost and are available in a limited quantity, its proper utilisation is very necessary to achieve the goal of wealth maximisation.
  
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    Short-term
    
  • 
    Long-term
    

Financing Decisions:

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  optimum capital structure
  

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  The debt-equity ratio
  

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  To minimise the risk and raise the profitability then the market prices of the shares will go up maximising the wealth of shareholders
  

Dividend Decision:

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  the disbursement of profits back to investors who supplied capital to the firm
  

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  the question of dividend stability, stock dividend (bonus shares) and cash dividend.
  

Link between Life cycle – economic strategy-investment decision-operational activity

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  Life cycle:
  
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    Birth
    
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    Childhood
    
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    Youth
    
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    Early maturity
    
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    Maturity
    
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    Aging
    
  • 
    Revival
    

Birth

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  market penetration
  
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    →initial investment
    
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  →Ensure survival (disposal of companies)
  

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  Disposal of companies plays a central role in improving the profitability of the lower quartile.
  
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  Joseph Lakonyshok (2004)