Global recession and emerging challenges for human resources management in india

Global recession and emerging challenges for human resources management in india INTRODUCTION Meaning of Global Recession A recession is a decline in a countrys Gross Domestic Product (GDP) growth for two or more consecutive quarters of a year. A recession is also preceded by several quarters of slowing down. An economy, which grows over of period of time, tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. These leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors spend less; as they fear stocks values will fall and thus stock markets fall on negative sentiment. Risk aversion, deleveraging and frozen money markets and reduced investor interest adversely affect t capital and financial flows, import export and overall GDP of an economy. This is what exactly what happened in US and as a result of contagion effect spread all over the world due to high integration in the global economy. According to the International Monetary Fund (IMF)s latest Global Financial Stability report (GFSR) widening and deepening fallout from the US subprime mortgage crisis have profound financial system and macro-economic implications. While the US remains at the ‘epicenter, the backwash effect of the American financial institution in other countries ‘reflecting the same overly benign global financial conditions, an inattention to appropriate risk management systems and lapses in prudential supervision. The global slowdown has its implications on the domestic economy. During the last three years Indian Economy grew at an average annual rate of 8.6 per cent. For the first time the economy has shown signs of deceleration and grew at 7.8 per cent in the first half year of 2008-09 (April-September). The service sector, which contributes more than 50% share in the GDP and is the prime growth engine, reported to be slowing down, mainly in the transport, communication, trade, and hotels restaurants sub-sectors. The industrial growth has decelerated sharply during April-November, 2008 encompassing all the constituent sectors. In manufacturing sector, the growth has come down to 4.0 per cent in April-November, 2008 as compared to 9.8 percent in the corresponding period of last year. The slowdown occurred in the all the use-based categories, except consumer goods where it has accelerated. Meaning of HRM Humans are an organizations greatest assets; without them, everyday business functions such as managing cash flow, making business transactions, communicating through all forms of media, and dealing with customers could not be completed. Humans and the potential they possess drive an organization. Todays organizations are continuously changing. Organizational change impacts not only the business but also its employees. In order to maximize organizational effectiveness, human potential—individuals capabilities, time, and talents—must be managed. Human resource management works to ensure that employees are able to meet the organizations goals. Human resource management is responsible for how people are treated in organizations. It is responsible for bringing people into the organization, helping them perform their work, compensating them for their labors, and solving problems that arise. There are seven management functions of a human resources (HR) department that will be specifically addressed: staffing, performance appraisals, compensation and benefits, training and development, employee and labor relations, safety and health, and human resource research. Global Recession and HRM The financial downturn is impacting developed as well as developing economies are likely to get worse as the European countries, the US and others go into a deeper depression due to the increase in job losses which often follows recession. The slump in the market and increased job losses will have some important implications for the changing task of human resource professionals. As the unemployment continues to increase, HR professionals are likely to be dealing with more stressed employees who are the sole wage earners in their families. As recession is becoming the part of the normal cycle of business. Therefore it makes just as much sense to plan for recession or downturns as it does to plan for good, economic times. OBJECTIVE This economic downfall has affected all the major sectors in India including IT, aviation, banking, real estate, tourism, outsourcing, telecommunication, etc with its consequence mainly on the HR policies of these industries. This article discusses Impact of economic slowdown on employment in India. The emerging challenges of human resource management in the global recession situation. The strategy adopted by HR personnel to deal with these challenges. HYPOTHESIS In todays economic meltdown where job cuts, loss, pay reduction, last come first go, insecurity of employment atmosphere prevail, HR has special responsibility to create ease environment to the affected by counseling, displaying care and concern, preparing them for multi skill task, engaging and deploying in other required areas of functions like security, crisis management team, etc. Global recession has raised various emerging challenges for Human Resources Managers HR needs to be proactive innovative and try to come up with early interventions as for any organization to survive during recession. REVIEW OF LITERATURE â€Å"The global economic crisis is expected to lead to painful cuts in the wages of millions of workers worldwide in the coming year. It predicts that the slow or negative economic growth, combined with highly volatile food and energy prices, will erode the real wages of the worlds 1.5 billion wage-earners, particularly low-wage and poorer households. Between the years 1995 and 2007, for each one per cent decline in GDP per 2 capita, average wages fell even further by 1.55 percentage point, a result that points to the possible effects on wages in the current crisis. [International Labour Office (ILO), 2007-08]. ‘The economic slowdown of the advanced countries which started around mid-2007, as a result of sub-prime crisis in USA, led to the spread of economic crisis across the globe. Many hegemonic financial institutions like Lehman Brothers or Washington Mutual or General Motors collapsed and several became bankrupt in this crisis. According to the current available assessment of the IMF, the global economy is projected to contract by 1.4 per cent in 2009.Even as recently as six months ago, there was a view that the fallout of the crisis will remain confined only to the financial sector of advanced economies and at the most there would be a shallow effect on emerging economies like India. These expectations, as it now turns out, have been belied. The contagion has traversed from the financial to the real sector; and it now looks like the recession will be deeper and the recovery longer than earlier anticipated. Many economists are now predicting that this ‘Great Recessionof 2008 -09 will be the worst global recession since the 1930s.[Choudhari 2008] â€Å"The financial downturn that is impacting developed economies are likely to get worse as the European countries, the US and others go into a deeper depression due to the increase in Job losses which often follows recession. The slump in the market and increased job losses will have some important implications for the changing tasks of human resource professionals. As the unemployment continues to increase, HR professionals are likely to be dealing with more stressed employees who are the sole wage earners in their families†. [Mujtaba, 2008} â€Å"The global economic crisis has brought to the forefront of organizations the concepts of viability and survival which at these times can be desperate pursuit. There are three main reactions in organizations, namely the corporate reactions in organizations, namely the corporate reaction to remain viable, the employee reaction to survive the turbulence, and the human resources reaction ( including recruiting and hiring talent, corporate organization, training and institutional learning)†. [Kathleen Patterson Gray Oster, 2008] â€Å"In emerging economies, growth is projected to slow down appreciably but still may reach 5.0 percent in the year 2009. The overall recruitments are lower for the industry this time as companies remain cautious amidst the global financial crisis.† [Srivastav, 2009] â€Å"Growth in real wages has slowed down globally in 2008 because of the economic crisis and the trend is expected to continue in 2009, despite signs of economic recovery. Growth in average wages reduced from 4.3 % in 2007 to 1.4% in 2008. Real wages in the first quarter of 2009 also fell in more than half of 35 countries, compared to the annual average of 2008, â€Å"Wage deflation deprives national economies of much needed demand and seriously affects confidence,† â€Å"Minimum wages are an important policy tool for social protection and proposes that minimum wages be combined with other income support measures and/or tax reductions†. [ILO,2009] The last time anyone faced a situation like this was in the 1930s, so if there is anyone who is 98 (assuming they should have been at least 20 then) and is coherent†¦ the rest of us are figuring out and learning on the fly, reasons Elango R, chief human resources officer, Mphasis. According to Elango, Managing the unknown, visualizing into the uncertain future, constantly calibrating and tuning the variables†¦ and hoping to high heaven that you are on the right path†¦ are responsible for increasing stress levels. He believes that the challenge is to take long term decisions without issuing the short term. This requires skills, knowledge and thinking that are not called on in a growth environment. In a growth environment, ones pre-occupations are different, and having seen growth for years most of us are skilled at this. The current business environment entails a delicate tightrope walk balancing both the business interests and employee interests. [Elango R, 2008] RESEARCH METHODOLOGY Secondary Data collected from various sources like * Economic Political weekly * HRM Journals * ILO Reports * Ministry of Labour Employment Labour Bureau ANALYSIS INTERPRETATION I. Impact of economic slowdown on employment in India. Ø Ripples of recession leading to reduction in exports to developed countries are being felt by all the developing countries. Credit availability and its cost have become major areas of concern. The combined impact of all these factors would be loss of employment and reduction of income leading to social distress. The International Monetary Fund (IMF) placed the estimated world output growth at 3.75 per cent in the year 2008 and 2.2 percent in the year 2009 in World Economic Outlook (WEO), November 2008, which represented a significant slide from a level of about 5.0 per cent in the year 2007. Ø The global situation deteriorated rapidly after mid September, 2008 following the collapse of Lehman Brothers, one of the top five investment banks in the US, the collapse of American International Group (AIG) Bank and also of the mortgage lenders Freddie Mae and Fannie Mae. There has been a massive choking of credit since then and a global crash in the stock markets. Ø The deepening of the global crisis and subsequent deleveraging and risk aversion in the global markets affected the Indian equity and the foreign exchange markets. While the Indian economy has a sufficient internal ballast to withstand the impact of global recession because of overall strength of domestic demand and the predominantly domestic nature of financing of investment and exposure of exports to less than 20% of GDP, nevertheless some slowdown is inevitable. It may be observed from Table 1 that the total estimated employment in all the sectors covered by the survey went down from 16.2 million during September, 2008 to 15.7 million during December, 2008 resulting in job loss of about half a million. It is seen that the employment declined every month during this period. It has also been observed that the employment in all the sectors/industries studied went up significantly over the period from March, 08 to September, 2008. Beyond September, 2008, it has however, decelerated at all industries/sectors level at an average rate of 1.01 per cent per month. Table 1 Trends in Average Employment Period Average Employment in Percentage (millions)change September, 08 16.2 October,08 16.0 -1.21 November,08 15.9 -0.74 December,08 15.7 -1.12 Average Monthly change -1.01 Source : Government of India, Ministry of Labour Employment Labour Bureau, Chandigarh. From the above data it is observed that the management people and employees may experience anxiety around a number of issues during an economic crisis or downturn. The monthly average rate of employment loss during Oct- Dec, 2008 was 1.01 per cent whereas in January, 2009 the rate of decline has increased to 1.17 per cent. The increase in rate of change is mainly due to the decline in employment in IT/BPO sector in January, 2009 in contrast to the increase in employment during Oct-Dec, 2008 and also higher rate of unemployment in Automobile Sector. The month wise employment trends are presented in Table 1.2. Table 1.2 Trends in Average Employment Sl. No. Period % Rate of Decline 1 October, 2008 1.21 2 November, 2008 0.74 3 December, 2008 1.12 5 January, 2009 1.17 Source : Government of India, Ministry of Labour Employment Labour Bureau Chandigarh The economic slowdown is expected to adversely impact the quality of employment besides the quantity reflected by decline in employment. The quality aspect is measured in terms of decrease in average wages received by the employees. Hence information is also collected on the total 12 earnings of workers. The results of the survey reveal that the average monthly wages have also declined by 0.26 per cent in January 2009. The average monthly decline during Oct-Dec, 2008 was 3.45 per cent. During the current survey the average monthly wages for direct and contract workers are also collected. The findings of the survey reveal that average monthly decline in the wages are 0.25 per cent for direct category of workers and 0.63 per cent for contract workers in January, 2009. The information is presented in Table 1.3. Table 1.3 Percentage change in Average Monthly Earnings SR.No. Period Percentage Change 1 October, 2008 1.74 2 November, 2008 -11.43 3 December, 2008 -0.5 4 January, 2009 -0.26 Source : Government of India, Ministry of Labour Employment Labour Bureau Chandigarh Table 1.4 Month Wise Estimated Job Loss Sl.No. PeriodEstimated Job Cumulative Job LossLoss 1 October, 2008 1,96,092 1,96,092 2 November, 2008 1,17,550 3,13,642 3 December, 2008 1,77,222 4,90,864 4 January, 2009 98,156 5,89,020 Source : Government of India, Ministry of Labour Employment Labour Bureau Chandigarh It needs to be noted that the rate of decline in employment in January, 2009 is higher than average monthly rate of the previous quarter, whereas the total loss of employment estimated is less than the previous monthly estimates. In this recession period HR play an important role to make the industry sustain and the entire economy flourish. This paper expresses the challenges of human resource management in the global recession situation. The role of the Human Resource Manager is evolving with the change in competitive market environment and the realization that Human Resource Management must play a more strategic role in the success of an organization. The most important challenge in recession period that is revolutionizing the Human Resource systems to identify, maintains, develop and utilize talents across the organization to their fullest capacities. The management of Human Resources has now assumed strategic importance in the achievement of organizational growth and excellence. As globalization advances and we move into the information age, organizations need to adapt to the changes in technology and the changing issues in management of people. II. The emerging challenges of Human Resource Management in the times global recession†¦Ã¢â‚¬ ¦ The role of the Human Resource Manager is evolving with the change in competitive market environment and the realization that Human Resource Management must play a more strategic role in the success of an organization. Organizations that do not put their emphasis on attracting and retaining talents may find themselves in dire consequences, as their competitors may be outplaying them in the strategic employment of their human resources. With the increase in competition, locally or globally, organizations must become more adaptable, resilient, agile, and customer-focused to succeed. And within this change in environment, the HR professional has to evolve to become a strategic partner, an employee sponsor or advocate, and a change mentor within the organization. In order to succeed, HR must be a business driven function with a thorough understanding of the organizations big picture and be able to influence key decisions and policies. In general, the focus of todays HR Manager is on strategic personnel retention and talents development. HR professionals will be coaches, counselors, mentors, and succession planners to help motivate organizations members and their loyalty. The HR manager will also promote and fight for values, ethics, beliefs, and spirituality within their organizations, especially in the management of workplace diversity. These paper discusses few important challenges of HRM due to recession and i.e†¦ Problem of Recruitment. Managing downsizing program appropriately. Talent management. Stress Management. The Return on Recognition in a Recession. 1. Recruitment and Recession. Recruitment industry is going through a tough time at this moment, the numbers have dropped drastically for the biggies and even recruitment agencies are battling for survival. Synergy Solutions provides recruitment services to companies in India and in US, the biggest challenge today is to find newer and better ways to add value to the clients. There is a need to find innovative ways to improve recruitment ROI for the client. First things first, the base idea is not to wait and find ways to weather the storm but to take proactive measures to tide the wave. The world is changing very quickly to combat recession and its about time we translate our thinking into action or else we will be late. The main reason being the companies who are hiring have recently made drastic cuts in their recruiting budget and are in the process of streamlining their side of the story. Companies (clients) has to demand greater accountability from recruitment agencies and focus on improving their recruitment ROI. Recruitment agencies / staffing companies who are agile in their operation and can quickly adapt to the changing environment will emerge victorious at the end of this recessionary period. Few areas where placement agencies should focus: * Closely monitoring the way each industry is changing in current times and the way companies within the industries are changing their hiring strategy. * Build stronger relationship with clients thereby working closely with your contact points in the company to get clarity on their internal hiring plans and prepare accordingly. This will also help protect your share in the pie from your competitors. * Clients will use this recession to re-negotiating the recruitment contracts with recruitment agencies. Since numbers are falling every day recruitment agencies will be concerned about their cash flow situation and as a result will have no option but to be forced to negotiate their existing contract. New client would want to start the relation on the terms advantageous to them, that means lower rates and tougher terms. * Look out for companies who are brave and would consider recession as the right time to recruit good quality talent at the right price. These are usually multinationals with deep pockets and would want to drive competitive advantage home. Be smart to attack these companies. * Train your recruiters to be tactically smart and agile in their actions. During the boom there were a lot of open positions and even more candidates available so the match making activity was comparatively easy and largely govern by the good sentiments in the market. During tougher times recruiters need to be smart and get themselves deeper into the fit gap process and ensure win win situation for the client and the candidate * Use of technology and social media applications to hunt better profiles as compared to job boards. Sites like LinkedIn, Facebook, Twitter and other social and business networking sites are fast becoming every recruiters trump card. Lot of head hunting can happen over these networking sites. * If your salary component are on the higher side and you foresee that its going to be difficult to sustain then take adequate action now try and offer a mix of lower fixed and higher variable with an assurance that salaries will get back to normal once the market stabilizes. 2. Managing downsizing appropriately. Virtually every country has to face the impact of a global economic downturn which can be in the form of recession, slowdown, depression or growth recession. When a downturn occurs, the organizations have to suffer heavy losses and bear the brunt of slow revenue generation. During this period, there is also less spending by the consumers, less investment by the investors and more of savings. Even the sectors who have been thriving in the boom period try to save more. Numerous causes can be attributed to the economic downturn and one of which affects the business is lack of skilled manpower. Other reasons could be the increasing population, lack of food supply, climatic condition, and entry of substitutes, inapt investments and technological changes. The shift in supply and demand hugely affects the entire business cycle. There can be acute shortage of cash supply leading to less or poor investments. All of this may ultimately affect the morale of the employees which should be a concern to every organization. Also, the decline in growth and decrease in profits certainly calls for certain top-of-the-line strategies to make adjustments to serve organizational needs. Managing the teams or human capital at this juncture is a Herculean task. So, a manager should devise certain strategies in order to manage teams during down turns. Downsizing during this period is certainly not a good option because if there are merits of laying off of employees, there are many demerits too. What should a manager do to manage teams or workforce? * Hold special meetings: During this unsafe situation, the organizations top most head or CEO should brief the meeting where the main subject should be the employees and their concern. If the head of any organization feels confidant, the whole organization feels confidant. Alternatively, middle-level managers and senior managers can conduct private meetings where they can console their subordinates. Also, give your workforce to ask questions and express their feelings regarding the business insecurity. * Motivate the employees: The key to managing and retaining the employees during downturn is motivation. Apart from the special meetings being conducted, a manager should regularly be attending to their problems and constantly trigger the employees to have good mood. * Offering challenging assignments and opportunities: If you offer your teams the challenging assignments, they spirits will be lifted and they will manage to survive even in bad times. * Explain to them the importance of their existence in jobs: There is no use crying over the spoilt milk, just like economy turning to a bad shape and business showing downfall. Its better that you discuss about the new projects and subsequently tell them what role they have to play. How their productivity can make the organization grow, explain to them. * Initiate change by identifying key people: There are few employees who are influencers and can bring about a lot of change in the organization. If these employees are given the right message to convince other team workers, the organization can move in the right direction. * Identify the achievers and reward them: Even during this period, you should give your employees the bonuses and increments if possible. In this way, they will always remain motivated and perform. All the above points are crucial to letting the organization grow to greater heights and following the above strategies will promote the general health of the organization despite economic downturns. 3. Talent Scenario during Recession The law of demand and supply mercilessly applies to human resources, also. During the economic downturn, companies were able to downsize by getting rid of redundant work force and dead wood. They also restructured the employee compensation (mostly by decreasing) to stave off financial losses. Only those employees were retained who proved their worth. The employees had to accept all kinds of compensation-related compromises while maintaining the same or even higher level of efficiency and productivity. They could thus survive the financial tsunami. These survivors got the opportunity to handle a variety of tasks that further sharpened their skills and made them multi-skilled. Thus, overall quality of talent has increased. At the same time, those who were out of job lost this opportunity to hone their skills in a new challenging environment. Adding to our woes, slashing of training and development budgets has led to a depletion of the number of skilled employees within the companies. Such steps from companies have created an altogether tricky scenario: The quality of talent within the companies has increased (raising the bar of the talent), while the quality of skills available in job market has dwindled. Now, recruiters can hire the required quality talent not from outside but from inside their competitors workplace. While many have forgotten the term â€Å"War for Talent†, the phenomenon is slowly re-emerging. â€Å"A study by Accenture has found that more than two-thirds of executives are now deeply concerned about not being able to recruit and retain the best talent. In todays global and highly competitive economy, the war for talent is now global, not local. The survey of more than 850 top executives from the U.S, UK, Italy, France, Germany, Spain, Japan and China found worries about talent management were growing, with 67 per cent this year putting it second only behind competition as the key threat, up from 60 per cent last year.† It may be worth noting that great companies such as Infosys, responded to the downturn by investing more in training. Instead of fearing of financial losses, these corporate focused on improving the quality of their employees skills. And the effect is visible in their financial results. Member of Infosys board of directors and head of HRD and Education and Research, T V Mohandas Pai said, â€Å"In response to the economic crisis, we had stepped up our investment in training. This has made us more competitive in fulfilling clients needs today.†The demand for talent in the market will never cease. Retention will always be a challenge. New Definition of Talent While war for talent continues, the bar for talent also goes up. Old skills and competencies may not work. Companies now need salesman who does not sell products but does sell solutions; production managers no longer control the operations, they are expected to innovate and improve productivity; and quality managers need to study competitive products with more zeal and help develop better products and services. The employers expectations have changed and are set to grow: Highly Productive: The talented employees need to be highly productive. They should deliver much more than they are compensated for. If that happens, employers are willing to give larger share to them. Multi-Skilled: Companies have discovered that one way to decrease recruitment cost is to have multi-skilled employees. Multi-skilled employees help reduce manpower dependence, and the overall sum of all the multi-skilled employees is greater than the same number of equal number of specialist. Self-Managed and Self-Motivated: Self-managed and self-motivated employees reduce managerial efforts. This helps organizations to have less number of managers. Innovative and Out-of-the-Box thinkers: As the rules of the business change and competition increases, the existing solutions no longer work. Companies need employees who constantly infuse new ideas and provide out-of-the-box solutions to meet a customer need that seems to have no end. The Key to Retain Talent Lies in HR Policies and Practices As organizations increase their expectations from employees, employers too have to significantly change the way they manage the talent. Talented employees continuously need new challenges and goals they can achieve, and a continuous supply of information and resources they can use to solve business problems. And needless to say, they will in return demand more lucrative and effective compensations, a great work culture and friendly HR policies. â€Å"Even during the recession, companies are reviewing and revising their leadership development programs. Survey after survey indicates that people who quit their jobs do so because of their relationship with the boss, not because of dissatisfaction with their job. A recession is a perfect time to take a hard look at leadership style and training to increase employee satisfaction with management.† Five Important Talent Retention Factors Lets us consider five factors that can help organizations retain talent to meet the client and business requirements in post-recession era: Clear Goals, Targets and Expectations: You need to tell them what exactly you expect from employees and what should they do to meet these expectations. A talented mind without a direction is most likely to pull the plug than a mediocre or a dead wood. Balanced Work Environment: Talented employees have huge positive energy and they exhaust this energy to meet the deadlines. But often they need time to re-energize themselves. Organizations that want to retain talented employees need to provide a positive environment that allows them to re-energize themselves more often. Track Performance Goals and Provide Analysis: Innovators and hard workers

A good and simple example is given by Fromlet

One fundamental notion in the finance and economic fields with regards to decision making has always been based on the underlying assumption that individuals or decision making agents are rational and objective. However, in many cases, rationalistic explanations have failed to answer major financial occurrences in the past.A good and simple example is given by Fromlet (2001), In 2001 the Swedish currency – the crown- was seriously undervalued in the foreign exchange market despite the fact that Swedish economy enjoyed a good economic growth record, had the lowest inflation rate among the 12 European Monetary union members, surplus government budget and a good, positive balance of payment position. Thus in this case all the rationalistic theories could not adequately explain the weakening of the crown given the fact that all economic indicators showed that it should be stronger.According to many theorists, even though realism cannot be attained, a good theoretical model should include mechanisms that help in relaxing as much assumptions as possible to attain a near realistic empirically based theory. Most of the traditional and neoclassical financial theory such as the capital asset pricing model (CAPM) and expected utility theory (EUT) are based on the unrealistic assumptions that can be explained as:†¢ Representative agents and players in the financial market are rational therefore base their decisions with the objective of maximizing wealth therefore asset pricing reflect the real value of the asset at any particular time (Thaler, 1999). †¢ The market given time will settle on an equilibrium point and that the equilibrium price reflects the real value of the asset that can rationally be explained using traditional theories (Ideal or rationally explained equilibrium) (Thaler, 1999).Behavioral finance is a relatively new field of study that has made tremendous progress in the attempt to answer these unrealistic assumptions and offer an alternat ive explanation of the financial market. Behavioral finance holds that the market is unrealistic due to the human element; therefore, in evaluation of financial market decision making and market condition, financial theories should recognize the role of human behavior in financial assets price determination.The composition of financial investors is diverse from fathers and mothers, household, spouses, students, businessmen, government leaders etc. are all decision makers in the financial market thus the assumption of rationality as provided by these theories is unrealistic (Ritter, 2003). These paper is an in depth evaluation of the behavioral theory and its application in the financial market. The paper will look at the strength and weaknesses of behavioral finance in an attempt to show its applicability as a tool in the financial market.Definition and description of behavioral finance. Behavioral finance is an empirically based theory, Behavioral finance theorists argue that to un derstand the performance and decision making in market, it important to integrate psychological and behavioral variables and classical financial theories in decision making and market atmosphere. According to this theory, the market is sometimes information inefficient and participants do not often make decision rationally.Behavioral finance uses to main concepts namely cognitive psychology and limits to arbitrage. Cognitive psychology as applied in behavioral finance focuses on behavioral factors influencing investor’s decision making or how people think; it postulates that investors make systematic errors in the manner they think and this contributes to irrationality in decision making. For instance, some investors might be overconfident and end up loosing due making investment decision based on this behavioral trait.This cognitive biases lead to irrational decision and can explain the weaknesses of classical financial theories with regards to why the market fails to attain equilibrium or conceptual expectation of rational investor decision in the financial market. (Ritter, 2003). Cognitive biases. Cognitive psychologists hold that there several cognitive biases that affect investor’s decisions in the market, as mentioned this biases lead investors to make systematic errors hence explaining irrationality in the financial market.This paper will highlight the cognitive biases by combining some of the documented behavioral patterns in arguing the case and behavior finance model case in the financial market it should be noted that psychological patterns and behavior categories as presented are interlinked to the extent that an individual can make decisions due to several behavioral patterns (Fromlet, 2001): 1/n Heuristics or rule of thumb. Heuristics or the rule of thumb is one common behavioral technique applied in decision making.According to the definition (as quoted in Fromlet, 2001), â€Å" heuristic means ‘use of experience and practic al efforts to answer questions or to improve performance. † Heuristics mean fast, selective interpretation of information, determined to a high extent by intuition–taking into account that the conclusions may not give the desired results because of the velocity and/or the incompleteness in the decision-making. †This technique makes it easier for investor’s since information in the market usually spreads faster, changes often and has become more complicated to interpret. Therefore, given various options many investors use the 1/n rule by spreading their funds equally or proportionately on the available options since it is easier than choosing the rational option based on the information hence introducing irrationality in the market in terms of decision making.A good example is if in a given financial market six different economic indicators are published, economists and investors have to assimilate and use the information as fast as they can to take advantag e of the market, some result to heuristic approach. This sometimes leads to suboptimal results and explains the difference between the ideal classical financial market of a rational investor and the real world. (Fromlet, 2001 and Ritter, 2003).Thaler (1999), argue that from empirical evidence collected in their research most individuals investing for retirement have little or no knowledge of the financial market hence uses the rule of thumb or 1/n heuristic approach to make decisions on where to put there retirement savings. Overconfidence and preference for certain information. Another pattern that manifests itself and lead to irrationality in decision making in the financial market is overconfidence.Ritter (2003), notes that entrepreneurs tend to be overconfident and hence invest too much in stocks or options that they are familiar with. This can be termed as an irrational tendency to the extent that it leads overconfident entrepreneurs tend to limit their options by not diversify ing their portfolio hence irrational since they tie up their assets (for example real estates) to the company they are familiar with partly due to the fact that they would feel in control of local familiar stocks compared to high returns stocks that are outside their control, this is referred to as control illusions.A good example world over is the fact that most workers tend to invest too much in the company they work for and this has led to loss of entire savings to many of the companies in the event of insolvency (see Ritter, 2003 pg. 434 for examples). Furthermore, it was noted that generally, men are more overconfident than women and this behavior extends to investment decisions. It was found out in a research by Bernard and Odeon (2001 as quoted in Ritter 2003) that the more men on average perform worse than women and this is partly attributed to the fact that they are overconfident than women.

The End of Essay Topics for Medea

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Globalization Is An Important Role On The World And...

Globalization plays an important role on the world and society today. Furthermore globalization is very arguable that it will induced cultural homogenization. Globalization can be simply defined by the process of cross culture between nation and nation or the process of international integration which actually mean the process of sharing ideas, cultures, concept and so forth between nations. (Appadurai 2000) and (McChesney 2001) they have a very different point of view of toward globalisation, they (Appadurai and McChesney) highlighted the negatives that caused by globalization and the impact on cultural homogenization. According to Appadurai he believes that globalization is a battle between homogenization and heterogenization referring to a series of â€Å"scapes† which consist of five movement which are ethnoscapes (movement of people), technoscapes (movement of technology), financescapes (movement of money), mediascapes (movement of media) and ideoscapes (movement of ideas ) (Appadurai 2011). Appadurai also mentioned that if globalization is brought into other countries, they â€Å"tend to become indigenized in one or another way† (Appadurai 2011). Hence, this claim rejects the notion that globalization leads to standardisation and globalisation will lead to imagines community conflicts. While McChesney defines neoliberalism as â€Å"the set of national and international policies that call for business domination of all social affairs with minimal countervailing force† (2001). McChesneyShow MoreRelatedVenezuelan Crisis: Grounds for Revolution? Essay1515 Words   |  7 Pagesfacing their country today. 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