Efficient Markets Hypothesis (EMH)

Efficient Markets Hypothesis (EMH) INTRODUCTION: Much of modern investment theory and practice is predicated on the Efficient Markets Hypothesis (EMH), the assumption that markets fully and instantaneously integrate all available information into market prices. Underlying this comprehensive idea is the assumption that the market participants are perfectly rational, and always act in self-interest, making optimal decisions. These assumptions have been challenged. It is difficult to tip over the Neo classical convention that has yielded such insights as portfolio optimization, the â€Å"Capital Asset Pricing Model†, the â€Å"Arbitrage Pricing Theory†, the â€Å"Cox Ingersoll-Ross theory† of the term structure of interest rates, and the â€Å"Black-S[choles/Merton option pricing model†, all of which are predicated on the EMH (Efficient Market Hypothesis) in one way or another. At few points the EMH criticizes the existing literature of behavioral finance, which shows the difference of opinion on psychology economics. The field of psychology has its roots in empirical observation, controlled experimentation, and clinical applications. According to psychology, behavior is the main entity of study, and only after controlled experimental dimensions do psychologists attempt to make inferences about the origins of such behavior. On the contrary, economists typically derive behavior axiomatically from simple principles such as expected utility maximization, making it easier for us to predict economic behavior that are routinely refuted empirically The biggest threats to Modern Portfolio theory is the theory of Behavioral Finance. It is an analysis of why investors make irrational decisions with respect to their money, normal distribution of expected returns generally appears to be invalid and also that the investors support upside risks rather than downside risks. The theory of Behavioral finance is opposite to the traditional theory of Finance which deals with human emotions, sentiments, conditions, biases on collective as well as individual basis. Behavior finance theory is helpful in explaining the past practices of investors and also to determine the future of investors. Behavioral finance is a concept of finance which deals with finances incorporating findings from psychology sociology. It is reviewed that behavioral finance is generally based on individual behavior or on the implication for financial market outcomes. There are many models explaining behavioral finance that explains investors behavior or market irregularities where the rational models fail to provide adequate information. We do not expect such a research to provide a method to make lots of money from the inefficient financial market very fast. Behavioral finance has basically emerged from the theories of psychology, sociology and anthropology the implications of these theories appear to be significant for the efficient market hypothesis, that is based on the positive notion that people behave rationally, maximize their utility and are able to prices observation, a number of anomalies (irregularities) have appeared, which in turn suggest that in the efficient market the principle of rational behavior is not always correct. So, the idea of analyzing other model of human behavior has came up. Further (Gervais, 2001) explained the concept where he says that People like to relate to the stock market as a person having different moods, it can be bad-tempered or high-spirited, it can overreact one day and make amends the next. As we know that human behavior is unpredictable and it behaves differently in different situations. Lately many researchers have suggested the idea that psychological analysis of investors may be very helpful in understanding the financial markets better. To do so it is important to understand the behavioral finance presenting the concept that Investors are not as rational as traditional theory has assumed, and biases in their decision-making can have a cumulative effect on asset prices. To many researchers behavioral finance is a revolution, transforming how people see the markets and what influences prices. The paradigm is shifting. People are continuing to walk across the border from the traditional to the behavioral camp†. (Gervais, 2001, P.2) . On the contrary some people believe that may be its too early call it a revolution. Eugene Fama( Gervais, 2001) argued that Behavioral finance has not really shown impacts on the world prices, and the models contradict each other on different point of times. He gave little credit to behaviorist explanations of trends and anomalies(any occurrence or object that is strange, unusual, or unique) arguing that data-mining techniques make it possible to locate patterns. Other researchers have also criticized the idea that the behavioral finance models tend to replace the traditional models of market functions. The weaknesses in this area, explained by him (Gervais, 2001) are that generally the market behavior displayed is attributed to overreaction and sometimes to under reaction. Where People take the behavior that seems to be easy for the particular study regardless of the fact that whether these biases are the result of underlying economic forces or not. Secondly, Lack of trained and expert people. The field does not have enough trained professionals both academic psychology and traditional finance and so the models that are being put up together are improvised. David Hirshleifer (Gervais, 2001) focuses on the individual behavior influencing asset prices, suggesting that behavioral finance is in its developmental stage and not yet a mature one, theres a lot of disagreement but productive one. Hirshleifer agrees that applying behavioral-finance concepts to corporate finance can pay off. If managers are imperfectly rational, he says, perhaps they are not evaluating investments correctly. They may make bad choices in their capital-structure decisions. Few people realistically think behavioral finance will displace efficient-markets theory. On the other hand, the idea that investors and managers are not uniformly rational makes insightful sense to many people. Traditional Finance Empirical Evidence: â€Å"Traditional theory assumes that agents are rational the law of one price holds† that is a perfect scenario. Where the law of â€Å"One price† states that securities with the same pay off have same price, but in real world this law is violated when people purchase securities in one market for immediate resale in another, in search of higher profits because of price differentials known as â€Å"Arbitrageurs†. And the agents rationality explains the behavior of investor â€Å"Professional Individual† which is generally inconsistent with the rationality or the future predictions. If a market achieves a perfect scenario where agents are rational law of one price holds then the market is efficient. With the availability of amount of information, the form of market changes. It is unlikely that market prices contain all private information. The presence of â€Å"noise traders† (traders, trading randomly not based on information). Researches show that stock returns are typically unpredictable based on past returns where as future returns are predictable to some extent. Few examples from the past literature explains the problem of irrationality which occurs because of naà ¯ve diversification, behavior influenced by framing, the tendency of investors of committing systematic errors while evaluating public information.(Glaser et al, 2003) Recent studies suggest that peoples` attitude towards the riskiness of a stock in future the individual interpretation may explain the higher level trading volume, which itself is a vast topic for insight. A problem of perception exist in the investors that Stocks have a higher risk adjusted returns than bonds. Another issue with the investors is that these investors either care about the whole stock portfolio or just about the value of each single security in their portfolio and thus ignore the correlations. The concept of ownership society has been promoted in the recent years where people can take better care of their own lives and be better citizen too if they are both owner of financial assets and homeowners. As a researcher suggested that in order to improve the lives of less advantaged in our society is to teach them how to be capitalist, In order to put the ownership society in its right perspective, behavioral finance is needed to be understood. The ownership society seems very attractive when people appear to make profits from their investments. Behavioral finance also is very helpful in understanding justifying government involvement in the investing decisions of individuals. The failure of millions of people to save properly for their future is also a core problem of behavioral finance. (Shiller, 2006) According to (Glaser et al, 2003) there are two approaches towards Behavioral Finance, where both tend to have same goals. The goals tend to explain observed prices, Market trading Volume Last but not the least is the individual behavior better than traditional finance models. Belief Based Model: Psychology (Individual Behavior) Incorporates into Model Market prices Transaction Volume. It includes findings such as Overconfidence, Biased Self- Attrition, and Conservatism Representativeness. Preference Based Model: Rational Friction or from psychology Find explanations, Market detects irregularities individual behavior. It incorporates Prospect Theory, House money effect other forms of mental accounting. Behavioral Finance and Rational debate: The article by (Heaton and Rosenberg,2004) highlights the debate between the rational and behavioral model over testability and predictive success. And we find that neither of them actually offers either of these measures of success. The rational approach uses a particular type of rationalization methodology; which goes on to form the basis of behavior finance predictions. A closer look into the rational finance model goes on to show that it employs ex post rationalizations of observed price behaviours. This allows them greater flexibility when offering explanations for economic anomalies. On the other hand the behavior paradigm criticizes rationalizations as having no concrete role in predicting prices accurately, that utility functions, information sets and transaction costs cannot be ‘rationalized. Ironically they also reject the rational finances explanatory power which plays an essential role in the limits of arbitrage, which actually makes behavioral finance possible. Milton Friedmans theory lays the basis of positive economics. His methodology focuses on how to make a particular prediction; it is irrelevant whether a particular assumption is rational or irrational. According to this methodology, the rational finance model relies on a limited â€Å"assumption space since all assumptions that are supposedly not rational have been eliminated. This is one of the major reasons behind the little success in rational finance predictions. Despite the minimal results, adherents of this model have criticized the behavioral model as lacking quantifiable predictions that are based on mathematical models. Rational finance has targeted a more important aspect in the structure of the economy, i.e. investor uncertainty, which further cause financial anomalies. In explaining these assertions, the behavioural emphasises the importance of taking limits in arbitrage. Friedmans methodological approach falls into the category ‘instrumentalism, which basically states that theories are tools for predictions and used to draw inferences. Whether an assumption is realistic or rational is of no value to an instrumentalist. By narrowing what may or may not be possible, one will inevitably eliminate certain strategies or behaviors which might in fact go on to maximize utility or profits based on their uniqueness. An assumption could be irrational even in the long run, but it is continuously revised and refined to make it into something useful. In opposition to this, many individuals have gone on to say that behaviouralists are not bound by any constraints thus making their explanations systematically irrational. Rubinstein (2001) described how when everyone fails to explain a particular anomaly, suddenly a behavioral aspect to it will come up, because that can be based on completely abstract irrational assumptions. To support rationality, Rubinstein came up with two arguments. Firstly he went on to say that an irrational strategy that is profitable, will only attract copy cat firms or traders into the market. This is supported when a closer look is given towards limits to arbitrage. Secondly through the process of evolution, irrational decisions will eventually be eliminated in the long run. The major achievements characterized of the rational finance paradigm consist of the following: the principle of no arbitrage; market efficiency, the net present value decision rule, derivatives valuation techniques; Markowitzs (1952) mean-variance framework; event studies; multifactor models such as the APT, ICAPM, and the Consumption- CAPM. Despite the number of top achievements that supporters of the rational model claim, the paradigm fails to answer some of the most basic financial economic questions such as ‘What is the cost of capital for this firm? or ‘What is its optimal capital structure?; simply because of their self imposed constraints. So far this makes it seem like rational finance and behavioral finance are mutually exclusive. Contrary to this, they are actually interdependent, and overlap in several areas. Take for instance the concept of mispricing when there is no arbitrage. Behavior finance on the other hand suggests that this may not be the case; irrational assumptions in the market will still lead to mispricing. Further even though certain arbitrageurs may be able to identify irrationality induced mispricing, because of the imperfect market information, they are unable to convince investors of its existence. Over here, the rational model is accepting the existence of anomalies which are affected both through the factors of risk and chance; therefore coinciding with the perspective of behavioral finance. Two instances are clear examples of how rationalization is an important limit of arbitrage: i) the build-up and blow-up of the internet bubble; and ii) the superiority of value equity strategies. If we focus on the latter, we are able to see behavioral finance literature that highlights the superiority of such strategies in the ability of analysts to extrapolate results for investors. This is possible when rationalization is taken as a limit to arbitrage. Similarly these strategies may also limit arbitrage against mispricing, through the great risk associated with stocks. In explaining most anomalies it is essential that analysts first conclude whether pricing is rational or not. To prove their hypothesis that irrationality-induced mispricing exists, behaviouralists may find it easier if they accepted the role of rationalization in limits of arbitrage. Slow information diffusion and short-sales constraints are other factors that explain mispricing. However these factors alone cannot form the basis of a strong and concrete explanation that will clarify pricing across firms and also across time. Those supporting the rational paradigm attack behavioral finance adherents in that their predictions for the financial market have been made on irrational assumptions; that are not supported by concrete mathematical or scientific models. In their view the lack of concrete discipline in the methodology adopted in behavior finance leads to the lack of testing in their forecasts. On the other hand the rational model is criticized for its lack of success in financial predictions. The behaviouralists claim that this limitation exists because the supporters of rational finance dismiss aspects of the economic market simply because it may not fall into explainable rational behavior. Both perspectives claim to align themselves with respect to the goals of ‘testability and ‘predictions, while at the same time continue to offer evidence against the other model. In reality however, rather than being exclusively mutual both paradigms assist one another in making their predictions. BODY: A cognitive bias is a persons tendency to make errors, based on cognitive factors. Forms of cognitive bias include errors in statistical judgment, social attribution, and memory that are common to all human beings. (Crowell, 1994, p. 1) â€Å"Cognitive bias is the tendency of intelligent, well-informed people to consistently do the wrong thing†. The reason behind this cognitive bias is that the Human brain is made for interpersonal relationships and not for processing statistics. The paper discusses facility of forecasts. Generally it is said that the world is divided into two groups. One who forecasts positively and one negatively. These forecasts exaggerate the reliability of their forecasts and trace it to the â€Å"illusion of validity† which exists even when the illusionary character is recognized. (Fisher and Statman, 2000) discussed five cognitive bias, underlying the illusion of validity that are Overconfidence, Confirmation, Representativeness, Anchoring, and Hindsight (Shiller, 2002) discusses, that irrational behavior may disappear with more learning and a much more structured situation. As the past research proves it that may of cognitive biases in human judgment value uncertainty will change, they may be convinced if given proper instructions, on the part-experience of irrational behavior. There are three main themes in behavioral finance and economics Heuristics: People often make decisions based on approximate rules of thumb, not strictly rational analysis. See also cognitive biases and bounded rationality. Prospect theory Loss aversion Status quo bias Gamblers fallacy Self-serving bias Money illusion Framing: The way a problem or decision is presented to the decision maker will affect their action. Cognitive framing Mental accounting Anchoring Market inefficiencies: There are explanations for observed market outcomes that are contrary to rational expectations and market efficiency. These include mis-pricings, non-rational decision making, and return anomalies. Richard Thaler, in particular, has described specific market anomalies from a behavioral perspective. Anomalies (economic behavior) Disposition effect Endowment effect Inequity aversion Intertemporal consumption Present-biased preferences Momentum investing Greed and fear Herd behavior Anomalies (market prices and returns) Equity premium puzzle Efficiency wage hypothesis Limits to arbitrage Dividend puzzle Models in behavioral economics are typically addressed to a particular observed market anomaly and adjust standard neo-classical models by describing decision makers as using heuristics and being affected by framing effects. In general, economics sits within the neoclassical framework, though the standard assumption of rational behavior is often challenged. Loix et. Al in their paper â€Å"Orientation towards Finances† explains the individual financial management behavior, people dealing with their financial means. They have analyzed the Non-specific Financial behavior as already we see extensive research on the specific finance behavior such as saving, Taxation, Gambling, amassing debt. But they had given a lot of importance to stock market, investors and households. The analysis of general public`s behavior was done, where an ordinary man is not sure and simply act according to the guesses over their money related issues. It was also found that people interested in economic and financial matters are much more active in collecting specific information than general public, stating that financial behavior of household is an important relevant topic that needs to be discussed in much more details. Household financial management is similar to the financial management. The construct of orientation towards finances was developed where the individual ORTO FIN focuses on competencies (interest and skills). Having stronger money attitude is an indication of stronger orientation towards finances and much more effective competencies. Therefore we expect some relevance and similarity between corporate and household management behavior as both require organizing, forecasting, planning and control. (Loix et. al, 2005) analyzed general publics behavior in basically dividing them into two groups, Financial Information Personal financial planning. Also explaining some practical and theoretical gaps in the area of psychology of money usage, they concluded that ORTOFIN (Orientation towards finance) indicates the involvement of individuals in managing their finances. Proving out the point that active interest in financial information and an urge to plan expenses are two main factors. A stronger ORTFIN indicates: Greater use of debit accounts, Higher savings account, Wide variety of investments, Greater awareness of ones financial Intimate knowledge of the details of Ones savings/deposit accounts obsessed by money, Higher achievement and power in monetary terms, Further age is also inversely proportional. Shiller in 2006, in his article talked about the the co-evolution of neo-classical and behavior finance. In 1937 when A. Samuelsson one of the great economists wrote about people maximizing the present value of utility subject to a present vale budget constraint. Another judgment he realized was time being consistent human behavior where if at any time t 0 Where people reconsidered the problem of maximization from that date forward, they would not change their decision where as in real life it is totally opposite for example people sometimes try to control themselves by binding their future decision as from history we find out that that some of man make irrevocable trust in the taking out of life insurance as a compulsory savings measure. (shiller, 2006, p.) Considering personal saving rate, saving and down for no reason has emerged as a weakness of human self control. People seem to be vulnerable to complacency from time to time about providing for their own future. The distinction between neoclassical and behavioral finance have therefore been exaggerated. Both of them are not completely different from each other. Behavioral finance is more elastic willing to learn from other sciences and less concerned about the elegance of models whereby explaining human behavior Investing and cognitive bias: Money Managers Money management is a very popular phenomenon. The performance in the stock market is measured at the daily basis and not to wait for a highly subjective annual review of ones performance by ones superior. Market grades you on a daily basis. The smarter one is, the more confident one becomes of ones ability to succeed, clients support them by trusting them that eventually helps their careers. But the truth is that few money managers put in sufficient amount of time and effort to figure out what works and develop a set of investment principles to guide their investment decisions (Browne, 2000). Further Browne discussed the importance of asset allocation and risk aversion, in order to understand why we do what we do regardless of whether it is rational or not. General public opts for money Managers to deal with their finances and these managers are categorized in three ways: Value Managers, Growth Managers and Market Neutral Managers. The vast majority of money managers are categorized as either value managers or growth managers although a third category, market neutral managers, is gaining popularity these days and may soon rival the so-called strategies of value and growth. Some investment management firms even are being cautious by offering all styles of investments. What too few money managers do is analyze the fundamental financial characteristics of portfolios that produce long-term market beating results, and develop a set of investment principles that are based on those findings. Difference of opinion on the definition of Value is the problem.The reasons for this are two-fold, one being the practical reality of managing large sums of money, and the other related to behavior. As the assets under management of an advisor grow, the universe of potential stocks shrinks Analyzing that why individual and professional investors do not change their behavior even when they face empirical evidence, that suggests that their decisions are less than optimal. An answer to this question is said to be that being a contrarian may simply be too risky for the average individual or professional. If a person is wrong on the collective basis, where everyone else also had made a mistake, the consequences professionally and for ones own self-esteem are far less than if a person is wrong alone. The herd instinct allows for the comfort of safety in numbers. The other reason is that individuals try to behave the same way and do not tend to change courses of action if they are happy. If the results are not too painful individuals can be happy with sub-optimal results. Moreover, individuals who tend to be unhappy make changes often and eventually end up being just as unhappy in their new circumstances. According to the traditional view of Investment management, fundamental forces drive markets, however many other investment firms considers to be active and working out based on their experienced Judgment. It is also believed that Judgmental overrides of Value Fundamental forces of markets can be lethal as well as a cause of Financial Disappointment. From the history it has been found that people Override at the wrong times and in most cases would be better off sticking to their investment disciplines (Crowell, 1994) and the reason to this behavior is the Cognitive bias. According to many researchers, stocks of small companies with low price/book ratios provide excess returns. Therefore, given a choice among small cheap stocks large high priced stocks, prominent investors (financial analysts, senior company executives and company directors) will certainly prefer the small cheap ones. But the fact is opposite to this situation where these prominent investors would opt for large high priced ones and so suffer from cognitive bias and further regret. According to a survey in 1992/1993, a research was carried out that included senior executives directors where they were suppose to rate companies in their industries on eight factors: Quality of management, Quality of products services, Innovativeness, Long term investment value, Financial soundness, Ability to attract, develop and keep talented people, Responsibility to the community and environment, Wise use of corporate assets. The assumptions that we made were that that â€Å"Long term investment value should be negatively correlated with size since small stocks provide superior returns. Long term Investment value should have a negative correlation with Price/book since low Price/Book stocks provide superior returns†.(Crowell, 1994). Whereas the results of the survey were contrary that stated that Long Term Investment had a positive correlation with the size and also that the Long term investment value had a positive correlation with the Price/Book stocks. According to Shefrin and statman, prominent investors overestimate the probability that a good company is a good stock, relying on the representative heuristics, concluding that superior companies make superior stocks. Aversion to Regret: aversion to regret is different from aversion to risk, Regret is acute when the individual must take responsibility for the final outcome. Aversion to regret leads to a preference for stocks of good companies. The choice of the stocks of bad companies involves more personal responsibility and higher probability of regret. Therefore, we find there are two major Cognitive errors: â€Å"We have a double cognitive error: a Good company make good stocks (representativeness), and involves less responsibility(Less aversion to regret† (Crowell, 1994,p.3) The Anti Cognitive bias actions would be admitting to your owned stocks, admitting earlier investment mistakes. Further Taking the responsibility for the actions to improve their performance in the future. The reasons for all the available disciplines, tools, and quantitative techniques is to deal with the Cognitive bias error, where the quantitative investment techniques enables the investment managers to overcome cognitive bias, follow sound investment, and eventually be successful contrarian investor(one who rejects the majority opinion, as in economic matters). Behavioral finance also is very helpful in understanding justifying government involvement in the investing decisions of individuals. The failure of millions of people to save properly for their future is also a core problem of behavioral finance. With the help of two very important examples Shiller explains how Government involvement can influence financial investments of individuals. In April 2005 â€Å"Tony Blair† stated a program when all new born babies were given a birthday present of 250 to 500. The present were to choose among a number of investment alternatives to invest until child comes of age. This is an effect done in order to make the parents feel connected with investments and modern economy. Another example: as it is said that people should be heavily active in stock market when they are young and so generally should reduce the activity with age. According to the conventional rule people should have 100 Age = % age of investment In 2005 president bush also portfolio announced one such plan for personal account â€Å"life cycle fund† which would be among the option that works will be offered to invest their personal account. It was A centerpiece of the presidents proposal bur a major point to be noticed was the default option. An important aspect of behavioral finance is the human attention is capricious focuses heavily tat same times on financial calculations and are subject to distraction and dissipation of default option is central. All this brings us a question that what should an intertemporal optimizer do to manage his portfolio over the lifetime. According to Samuelson someone who wished to maximize the expected value of his intertemporal utility function by managing the allocation of the portfolio between a high yielding asset and less yielding asset would not actually change the allocation through time. Neoclassic finance appears highly relevant to such a discussion in that it offers the appropriate theoretical framework for considering what people ought to do with the portfolio if not what they actually do. Behavioral is beginning to play an important role in public policy such as in social security reforms. Agents Rationality: Global culture Culture Social Contagion: The selective attention exhibited by a human mind is the concept of culture. Every nation, tribe or asocial group has a social cognition reinforced by conversation ritual and symbols, rituals and supposition of a particular nation has a subtle but far reliability affect on human behavior. Some researchers found that the unique customs of people actually arise as a logical consequence of a belief system of a nation group of people. Cultural factor were found to have great influence on rational or irrational behavior. We find many factors that are same across countries , e.g fashion, music, movies, youthful rebellious, other than these we find more factors in producing internationally- similar human behaviors then just rational reactions. Therefore it is a difficult job to decide in what avenues global culture exerts Efficient Markets Hypothesis (EMH) Efficient Markets Hypothesis (EMH) INTRODUCTION: Much of modern investment theory and practice is predicated on the Efficient Markets Hypothesis (EMH), the assumption that markets fully and instantaneously integrate all available information into market prices. Underlying this comprehensive idea is the assumption that the market participants are perfectly rational, and always act in self-interest, making optimal decisions. These assumptions have been challenged. It is difficult to tip over the Neo classical convention that has yielded such insights as portfolio optimization, the â€Å"Capital Asset Pricing Model†, the â€Å"Arbitrage Pricing Theory†, the â€Å"Cox Ingersoll-Ross theory† of the term structure of interest rates, and the â€Å"Black-S[choles/Merton option pricing model†, all of which are predicated on the EMH (Efficient Market Hypothesis) in one way or another. At few points the EMH criticizes the existing literature of behavioral finance, which shows the difference of opinion on psychology economics. The field of psychology has its roots in empirical observation, controlled experimentation, and clinical applications. According to psychology, behavior is the main entity of study, and only after controlled experimental dimensions do psychologists attempt to make inferences about the origins of such behavior. On the contrary, economists typically derive behavior axiomatically from simple principles such as expected utility maximization, making it easier for us to predict economic behavior that are routinely refuted empirically The biggest threats to Modern Portfolio theory is the theory of Behavioral Finance. It is an analysis of why investors make irrational decisions with respect to their money, normal distribution of expected returns generally appears to be invalid and also that the investors support upside risks rather than downside risks. The theory of Behavioral finance is opposite to the traditional theory of Finance which deals with human emotions, sentiments, conditions, biases on collective as well as individual basis. Behavior finance theory is helpful in explaining the past practices of investors and also to determine the future of investors. Behavioral finance is a concept of finance which deals with finances incorporating findings from psychology sociology. It is reviewed that behavioral finance is generally based on individual behavior or on the implication for financial market outcomes. There are many models explaining behavioral finance that explains investors behavior or market irregularities where the rational models fail to provide adequate information. We do not expect such a research to provide a method to make lots of money from the inefficient financial market very fast. Behavioral finance has basically emerged from the theories of psychology, sociology and anthropology the implications of these theories appear to be significant for the efficient market hypothesis, that is based on the positive notion that people behave rationally, maximize their utility and are able to prices observation, a number of anomalies (irregularities) have appeared, which in turn suggest that in the efficient market the principle of rational behavior is not always correct. So, the idea of analyzing other model of human behavior has came up. Further (Gervais, 2001) explained the concept where he says that People like to relate to the stock market as a person having different moods, it can be bad-tempered or high-spirited, it can overreact one day and make amends the next. As we know that human behavior is unpredictable and it behaves differently in different situations. Lately many researchers have suggested the idea that psychological analysis of investors may be very helpful in understanding the financial markets better. To do so it is important to understand the behavioral finance presenting the concept that Investors are not as rational as traditional theory has assumed, and biases in their decision-making can have a cumulative effect on asset prices. To many researchers behavioral finance is a revolution, transforming how people see the markets and what influences prices. The paradigm is shifting. People are continuing to walk across the border from the traditional to the behavioral camp†. (Gervais, 2001, P.2) . On the contrary some people believe that may be its too early call it a revolution. Eugene Fama( Gervais, 2001) argued that Behavioral finance has not really shown impacts on the world prices, and the models contradict each other on different point of times. He gave little credit to behaviorist explanations of trends and anomalies(any occurrence or object that is strange, unusual, or unique) arguing that data-mining techniques make it possible to locate patterns. Other researchers have also criticized the idea that the behavioral finance models tend to replace the traditional models of market functions. The weaknesses in this area, explained by him (Gervais, 2001) are that generally the market behavior displayed is attributed to overreaction and sometimes to under reaction. Where People take the behavior that seems to be easy for the particular study regardless of the fact that whether these biases are the result of underlying economic forces or not. Secondly, Lack of trained and expert people. The field does not have enough trained professionals both academic psychology and traditional finance and so the models that are being put up together are improvised. David Hirshleifer (Gervais, 2001) focuses on the individual behavior influencing asset prices, suggesting that behavioral finance is in its developmental stage and not yet a mature one, theres a lot of disagreement but productive one. Hirshleifer agrees that applying behavioral-finance concepts to corporate finance can pay off. If managers are imperfectly rational, he says, perhaps they are not evaluating investments correctly. They may make bad choices in their capital-structure decisions. Few people realistically think behavioral finance will displace efficient-markets theory. On the other hand, the idea that investors and managers are not uniformly rational makes insightful sense to many people. Traditional Finance Empirical Evidence: â€Å"Traditional theory assumes that agents are rational the law of one price holds† that is a perfect scenario. Where the law of â€Å"One price† states that securities with the same pay off have same price, but in real world this law is violated when people purchase securities in one market for immediate resale in another, in search of higher profits because of price differentials known as â€Å"Arbitrageurs†. And the agents rationality explains the behavior of investor â€Å"Professional Individual† which is generally inconsistent with the rationality or the future predictions. If a market achieves a perfect scenario where agents are rational law of one price holds then the market is efficient. With the availability of amount of information, the form of market changes. It is unlikely that market prices contain all private information. The presence of â€Å"noise traders† (traders, trading randomly not based on information). Researches show that stock returns are typically unpredictable based on past returns where as future returns are predictable to some extent. Few examples from the past literature explains the problem of irrationality which occurs because of naà ¯ve diversification, behavior influenced by framing, the tendency of investors of committing systematic errors while evaluating public information.(Glaser et al, 2003) Recent studies suggest that peoples` attitude towards the riskiness of a stock in future the individual interpretation may explain the higher level trading volume, which itself is a vast topic for insight. A problem of perception exist in the investors that Stocks have a higher risk adjusted returns than bonds. Another issue with the investors is that these investors either care about the whole stock portfolio or just about the value of each single security in their portfolio and thus ignore the correlations. The concept of ownership society has been promoted in the recent years where people can take better care of their own lives and be better citizen too if they are both owner of financial assets and homeowners. As a researcher suggested that in order to improve the lives of less advantaged in our society is to teach them how to be capitalist, In order to put the ownership society in its right perspective, behavioral finance is needed to be understood. The ownership society seems very attractive when people appear to make profits from their investments. Behavioral finance also is very helpful in understanding justifying government involvement in the investing decisions of individuals. The failure of millions of people to save properly for their future is also a core problem of behavioral finance. (Shiller, 2006) According to (Glaser et al, 2003) there are two approaches towards Behavioral Finance, where both tend to have same goals. The goals tend to explain observed prices, Market trading Volume Last but not the least is the individual behavior better than traditional finance models. Belief Based Model: Psychology (Individual Behavior) Incorporates into Model Market prices Transaction Volume. It includes findings such as Overconfidence, Biased Self- Attrition, and Conservatism Representativeness. Preference Based Model: Rational Friction or from psychology Find explanations, Market detects irregularities individual behavior. It incorporates Prospect Theory, House money effect other forms of mental accounting. Behavioral Finance and Rational debate: The article by (Heaton and Rosenberg,2004) highlights the debate between the rational and behavioral model over testability and predictive success. And we find that neither of them actually offers either of these measures of success. The rational approach uses a particular type of rationalization methodology; which goes on to form the basis of behavior finance predictions. A closer look into the rational finance model goes on to show that it employs ex post rationalizations of observed price behaviours. This allows them greater flexibility when offering explanations for economic anomalies. On the other hand the behavior paradigm criticizes rationalizations as having no concrete role in predicting prices accurately, that utility functions, information sets and transaction costs cannot be ‘rationalized. Ironically they also reject the rational finances explanatory power which plays an essential role in the limits of arbitrage, which actually makes behavioral finance possible. Milton Friedmans theory lays the basis of positive economics. His methodology focuses on how to make a particular prediction; it is irrelevant whether a particular assumption is rational or irrational. According to this methodology, the rational finance model relies on a limited â€Å"assumption space since all assumptions that are supposedly not rational have been eliminated. This is one of the major reasons behind the little success in rational finance predictions. Despite the minimal results, adherents of this model have criticized the behavioral model as lacking quantifiable predictions that are based on mathematical models. Rational finance has targeted a more important aspect in the structure of the economy, i.e. investor uncertainty, which further cause financial anomalies. In explaining these assertions, the behavioural emphasises the importance of taking limits in arbitrage. Friedmans methodological approach falls into the category ‘instrumentalism, which basically states that theories are tools for predictions and used to draw inferences. Whether an assumption is realistic or rational is of no value to an instrumentalist. By narrowing what may or may not be possible, one will inevitably eliminate certain strategies or behaviors which might in fact go on to maximize utility or profits based on their uniqueness. An assumption could be irrational even in the long run, but it is continuously revised and refined to make it into something useful. In opposition to this, many individuals have gone on to say that behaviouralists are not bound by any constraints thus making their explanations systematically irrational. Rubinstein (2001) described how when everyone fails to explain a particular anomaly, suddenly a behavioral aspect to it will come up, because that can be based on completely abstract irrational assumptions. To support rationality, Rubinstein came up with two arguments. Firstly he went on to say that an irrational strategy that is profitable, will only attract copy cat firms or traders into the market. This is supported when a closer look is given towards limits to arbitrage. Secondly through the process of evolution, irrational decisions will eventually be eliminated in the long run. The major achievements characterized of the rational finance paradigm consist of the following: the principle of no arbitrage; market efficiency, the net present value decision rule, derivatives valuation techniques; Markowitzs (1952) mean-variance framework; event studies; multifactor models such as the APT, ICAPM, and the Consumption- CAPM. Despite the number of top achievements that supporters of the rational model claim, the paradigm fails to answer some of the most basic financial economic questions such as ‘What is the cost of capital for this firm? or ‘What is its optimal capital structure?; simply because of their self imposed constraints. So far this makes it seem like rational finance and behavioral finance are mutually exclusive. Contrary to this, they are actually interdependent, and overlap in several areas. Take for instance the concept of mispricing when there is no arbitrage. Behavior finance on the other hand suggests that this may not be the case; irrational assumptions in the market will still lead to mispricing. Further even though certain arbitrageurs may be able to identify irrationality induced mispricing, because of the imperfect market information, they are unable to convince investors of its existence. Over here, the rational model is accepting the existence of anomalies which are affected both through the factors of risk and chance; therefore coinciding with the perspective of behavioral finance. Two instances are clear examples of how rationalization is an important limit of arbitrage: i) the build-up and blow-up of the internet bubble; and ii) the superiority of value equity strategies. If we focus on the latter, we are able to see behavioral finance literature that highlights the superiority of such strategies in the ability of analysts to extrapolate results for investors. This is possible when rationalization is taken as a limit to arbitrage. Similarly these strategies may also limit arbitrage against mispricing, through the great risk associated with stocks. In explaining most anomalies it is essential that analysts first conclude whether pricing is rational or not. To prove their hypothesis that irrationality-induced mispricing exists, behaviouralists may find it easier if they accepted the role of rationalization in limits of arbitrage. Slow information diffusion and short-sales constraints are other factors that explain mispricing. However these factors alone cannot form the basis of a strong and concrete explanation that will clarify pricing across firms and also across time. Those supporting the rational paradigm attack behavioral finance adherents in that their predictions for the financial market have been made on irrational assumptions; that are not supported by concrete mathematical or scientific models. In their view the lack of concrete discipline in the methodology adopted in behavior finance leads to the lack of testing in their forecasts. On the other hand the rational model is criticized for its lack of success in financial predictions. The behaviouralists claim that this limitation exists because the supporters of rational finance dismiss aspects of the economic market simply because it may not fall into explainable rational behavior. Both perspectives claim to align themselves with respect to the goals of ‘testability and ‘predictions, while at the same time continue to offer evidence against the other model. In reality however, rather than being exclusively mutual both paradigms assist one another in making their predictions. BODY: A cognitive bias is a persons tendency to make errors, based on cognitive factors. Forms of cognitive bias include errors in statistical judgment, social attribution, and memory that are common to all human beings. (Crowell, 1994, p. 1) â€Å"Cognitive bias is the tendency of intelligent, well-informed people to consistently do the wrong thing†. The reason behind this cognitive bias is that the Human brain is made for interpersonal relationships and not for processing statistics. The paper discusses facility of forecasts. Generally it is said that the world is divided into two groups. One who forecasts positively and one negatively. These forecasts exaggerate the reliability of their forecasts and trace it to the â€Å"illusion of validity† which exists even when the illusionary character is recognized. (Fisher and Statman, 2000) discussed five cognitive bias, underlying the illusion of validity that are Overconfidence, Confirmation, Representativeness, Anchoring, and Hindsight (Shiller, 2002) discusses, that irrational behavior may disappear with more learning and a much more structured situation. As the past research proves it that may of cognitive biases in human judgment value uncertainty will change, they may be convinced if given proper instructions, on the part-experience of irrational behavior. There are three main themes in behavioral finance and economics Heuristics: People often make decisions based on approximate rules of thumb, not strictly rational analysis. See also cognitive biases and bounded rationality. Prospect theory Loss aversion Status quo bias Gamblers fallacy Self-serving bias Money illusion Framing: The way a problem or decision is presented to the decision maker will affect their action. Cognitive framing Mental accounting Anchoring Market inefficiencies: There are explanations for observed market outcomes that are contrary to rational expectations and market efficiency. These include mis-pricings, non-rational decision making, and return anomalies. Richard Thaler, in particular, has described specific market anomalies from a behavioral perspective. Anomalies (economic behavior) Disposition effect Endowment effect Inequity aversion Intertemporal consumption Present-biased preferences Momentum investing Greed and fear Herd behavior Anomalies (market prices and returns) Equity premium puzzle Efficiency wage hypothesis Limits to arbitrage Dividend puzzle Models in behavioral economics are typically addressed to a particular observed market anomaly and adjust standard neo-classical models by describing decision makers as using heuristics and being affected by framing effects. In general, economics sits within the neoclassical framework, though the standard assumption of rational behavior is often challenged. Loix et. Al in their paper â€Å"Orientation towards Finances† explains the individual financial management behavior, people dealing with their financial means. They have analyzed the Non-specific Financial behavior as already we see extensive research on the specific finance behavior such as saving, Taxation, Gambling, amassing debt. But they had given a lot of importance to stock market, investors and households. The analysis of general public`s behavior was done, where an ordinary man is not sure and simply act according to the guesses over their money related issues. It was also found that people interested in economic and financial matters are much more active in collecting specific information than general public, stating that financial behavior of household is an important relevant topic that needs to be discussed in much more details. Household financial management is similar to the financial management. The construct of orientation towards finances was developed where the individual ORTO FIN focuses on competencies (interest and skills). Having stronger money attitude is an indication of stronger orientation towards finances and much more effective competencies. Therefore we expect some relevance and similarity between corporate and household management behavior as both require organizing, forecasting, planning and control. (Loix et. al, 2005) analyzed general publics behavior in basically dividing them into two groups, Financial Information Personal financial planning. Also explaining some practical and theoretical gaps in the area of psychology of money usage, they concluded that ORTOFIN (Orientation towards finance) indicates the involvement of individuals in managing their finances. Proving out the point that active interest in financial information and an urge to plan expenses are two main factors. A stronger ORTFIN indicates: Greater use of debit accounts, Higher savings account, Wide variety of investments, Greater awareness of ones financial Intimate knowledge of the details of Ones savings/deposit accounts obsessed by money, Higher achievement and power in monetary terms, Further age is also inversely proportional. Shiller in 2006, in his article talked about the the co-evolution of neo-classical and behavior finance. In 1937 when A. Samuelsson one of the great economists wrote about people maximizing the present value of utility subject to a present vale budget constraint. Another judgment he realized was time being consistent human behavior where if at any time t 0 Where people reconsidered the problem of maximization from that date forward, they would not change their decision where as in real life it is totally opposite for example people sometimes try to control themselves by binding their future decision as from history we find out that that some of man make irrevocable trust in the taking out of life insurance as a compulsory savings measure. (shiller, 2006, p.) Considering personal saving rate, saving and down for no reason has emerged as a weakness of human self control. People seem to be vulnerable to complacency from time to time about providing for their own future. The distinction between neoclassical and behavioral finance have therefore been exaggerated. Both of them are not completely different from each other. Behavioral finance is more elastic willing to learn from other sciences and less concerned about the elegance of models whereby explaining human behavior Investing and cognitive bias: Money Managers Money management is a very popular phenomenon. The performance in the stock market is measured at the daily basis and not to wait for a highly subjective annual review of ones performance by ones superior. Market grades you on a daily basis. The smarter one is, the more confident one becomes of ones ability to succeed, clients support them by trusting them that eventually helps their careers. But the truth is that few money managers put in sufficient amount of time and effort to figure out what works and develop a set of investment principles to guide their investment decisions (Browne, 2000). Further Browne discussed the importance of asset allocation and risk aversion, in order to understand why we do what we do regardless of whether it is rational or not. General public opts for money Managers to deal with their finances and these managers are categorized in three ways: Value Managers, Growth Managers and Market Neutral Managers. The vast majority of money managers are categorized as either value managers or growth managers although a third category, market neutral managers, is gaining popularity these days and may soon rival the so-called strategies of value and growth. Some investment management firms even are being cautious by offering all styles of investments. What too few money managers do is analyze the fundamental financial characteristics of portfolios that produce long-term market beating results, and develop a set of investment principles that are based on those findings. Difference of opinion on the definition of Value is the problem.The reasons for this are two-fold, one being the practical reality of managing large sums of money, and the other related to behavior. As the assets under management of an advisor grow, the universe of potential stocks shrinks Analyzing that why individual and professional investors do not change their behavior even when they face empirical evidence, that suggests that their decisions are less than optimal. An answer to this question is said to be that being a contrarian may simply be too risky for the average individual or professional. If a person is wrong on the collective basis, where everyone else also had made a mistake, the consequences professionally and for ones own self-esteem are far less than if a person is wrong alone. The herd instinct allows for the comfort of safety in numbers. The other reason is that individuals try to behave the same way and do not tend to change courses of action if they are happy. If the results are not too painful individuals can be happy with sub-optimal results. Moreover, individuals who tend to be unhappy make changes often and eventually end up being just as unhappy in their new circumstances. According to the traditional view of Investment management, fundamental forces drive markets, however many other investment firms considers to be active and working out based on their experienced Judgment. It is also believed that Judgmental overrides of Value Fundamental forces of markets can be lethal as well as a cause of Financial Disappointment. From the history it has been found that people Override at the wrong times and in most cases would be better off sticking to their investment disciplines (Crowell, 1994) and the reason to this behavior is the Cognitive bias. According to many researchers, stocks of small companies with low price/book ratios provide excess returns. Therefore, given a choice among small cheap stocks large high priced stocks, prominent investors (financial analysts, senior company executives and company directors) will certainly prefer the small cheap ones. But the fact is opposite to this situation where these prominent investors would opt for large high priced ones and so suffer from cognitive bias and further regret. According to a survey in 1992/1993, a research was carried out that included senior executives directors where they were suppose to rate companies in their industries on eight factors: Quality of management, Quality of products services, Innovativeness, Long term investment value, Financial soundness, Ability to attract, develop and keep talented people, Responsibility to the community and environment, Wise use of corporate assets. The assumptions that we made were that that â€Å"Long term investment value should be negatively correlated with size since small stocks provide superior returns. Long term Investment value should have a negative correlation with Price/book since low Price/Book stocks provide superior returns†.(Crowell, 1994). Whereas the results of the survey were contrary that stated that Long Term Investment had a positive correlation with the size and also that the Long term investment value had a positive correlation with the Price/Book stocks. According to Shefrin and statman, prominent investors overestimate the probability that a good company is a good stock, relying on the representative heuristics, concluding that superior companies make superior stocks. Aversion to Regret: aversion to regret is different from aversion to risk, Regret is acute when the individual must take responsibility for the final outcome. Aversion to regret leads to a preference for stocks of good companies. The choice of the stocks of bad companies involves more personal responsibility and higher probability of regret. Therefore, we find there are two major Cognitive errors: â€Å"We have a double cognitive error: a Good company make good stocks (representativeness), and involves less responsibility(Less aversion to regret† (Crowell, 1994,p.3) The Anti Cognitive bias actions would be admitting to your owned stocks, admitting earlier investment mistakes. Further Taking the responsibility for the actions to improve their performance in the future. The reasons for all the available disciplines, tools, and quantitative techniques is to deal with the Cognitive bias error, where the quantitative investment techniques enables the investment managers to overcome cognitive bias, follow sound investment, and eventually be successful contrarian investor(one who rejects the majority opinion, as in economic matters). Behavioral finance also is very helpful in understanding justifying government involvement in the investing decisions of individuals. The failure of millions of people to save properly for their future is also a core problem of behavioral finance. With the help of two very important examples Shiller explains how Government involvement can influence financial investments of individuals. In April 2005 â€Å"Tony Blair† stated a program when all new born babies were given a birthday present of 250 to 500. The present were to choose among a number of investment alternatives to invest until child comes of age. This is an effect done in order to make the parents feel connected with investments and modern economy. Another example: as it is said that people should be heavily active in stock market when they are young and so generally should reduce the activity with age. According to the conventional rule people should have 100 Age = % age of investment In 2005 president bush also portfolio announced one such plan for personal account â€Å"life cycle fund† which would be among the option that works will be offered to invest their personal account. It was A centerpiece of the presidents proposal bur a major point to be noticed was the default option. An important aspect of behavioral finance is the human attention is capricious focuses heavily tat same times on financial calculations and are subject to distraction and dissipation of default option is central. All this brings us a question that what should an intertemporal optimizer do to manage his portfolio over the lifetime. According to Samuelson someone who wished to maximize the expected value of his intertemporal utility function by managing the allocation of the portfolio between a high yielding asset and less yielding asset would not actually change the allocation through time. Neoclassic finance appears highly relevant to such a discussion in that it offers the appropriate theoretical framework for considering what people ought to do with the portfolio if not what they actually do. Behavioral is beginning to play an important role in public policy such as in social security reforms. Agents Rationality: Global culture Culture Social Contagion: The selective attention exhibited by a human mind is the concept of culture. Every nation, tribe or asocial group has a social cognition reinforced by conversation ritual and symbols, rituals and supposition of a particular nation has a subtle but far reliability affect on human behavior. Some researchers found that the unique customs of people actually arise as a logical consequence of a belief system of a nation group of people. Cultural factor were found to have great influence on rational or irrational behavior. We find many factors that are same across countries , e.g fashion, music, movies, youthful rebellious, other than these we find more factors in producing internationally- similar human behaviors then just rational reactions. Therefore it is a difficult job to decide in what avenues global culture exerts

Food in My Family Essay

I come from a very diverse ethnic background, with many variations of what maybe considered cultural foods. I have many fond memories of family reunions and all the interesting dishes my relatives would prepare. Food in my family holds so much meaning; it’s the glue that has held us together for many years even before I was born. Food in my family isn’t just a substance we consume in order to keep our bodies healthy and energized. When we create a meal, it’s as if we are creating art by expressing ourselves in our dish. We take the time to perfect our meals, while also keeping our tradition alive by incorporating the same rituals as our ancestors before us. When it came to certain meals my mother was very traditional in preparing it, and it had to be done a certain way or it was ruined. She wanted to maintain our family’s culture in each dish she prepared. She felt as if by doing this it kept our ancestor’s memories alive; with each recipe preserved to its natural and formal state with zero alteration kept our tradition alive. She didn’t believe in wasting food, so when she prepared dishes she would make sure to cook everything from the head to the feet. My mother’s favorite dish to create was Peni which means pig in Spanish. I remember going to the meat market and having to wait on long lines to buy a whole pig so that she can begin prepping it for the family reunion that was scheduled for next week. My mother always said â€Å"Una de Las cosas mas importantes de recordar es que no es el alimento que usted come que es importante pero como usted lo creo que lo hace memorable†. In English it means â€Å"One of the most important things to remember is that it is not the food you eat that is important, but its how you created it that makes it memorable. † Preparing meals for a family reunion takes a group effort; especially if it requires large quantities of food needed. I believe it brought us closer together when we were cooking the meals compare to when we actually sat down to eat it. Everyone had there own responsibilities to help contribute to the meals, my family was big on making sure no one was left out. It brought everyone together as a whole, no matter what prier arguments you had with one another or what grudges you may have construed towards each other. It was always put aside when it came to family reunion, because on that day nothing else mattered but family. I believe certain foods can trigger certain memories, depending on what your mind can connect it too. For example every time I smell the sweet sent of buttered pancakes in the morning with a side of bacon. It reminds me of my mom and how I use to wake up and run to the kitchen as fast as I can trying to beat my brothers to the table, because I knew they would eat up all the beacon. It reminds me of happier days; when I use to not have to worry about anything and I could just be myself. When my mother would create Peni it would take hours to just prepare it and then she would have to wrap it up in alumini foil so that it would allow the seasonings to settle in. With big family reunions it bound to have some people bring the similar dishes. Even though they cooked the same type of meat doesn’t mean that they are the same dish. Since they were prepared by two different people with different backgrounds, the dish itself represents two completely different styles. For example my mother cooked a lot of her foods traditionally, because that’s how she was raised. She grew up with the knowledge of our ancestor recipes, but our relatives from other countries grow up with their own cooking style. They made it the best way they felt expresses themselves and what they grew accustom to. I looked forward to having family reunions not just because I enjoyed learning how create new dishes, but also I wanted to feel closer to my relatives who I hardly ever get to see. By tasting their foods I was able to take a journey to their home town. I was able to taste all the seasoning that they grew up with and to what they felt best express the true essence of the meat. From the bitter sweet aroma to the texture of how it was deliciously prepared with each morsel I bit into, you could tell how much attention to detail was put into it. I love trying new things especially created by my family members because their style of cooking was so different compare to what I was used to; it was so unique. It always surprised me how dramatically different there dishes tasted compared to my mothers. They would use ingredients I didn’t expect would ever mix so wonderfully together. That’s why I believe when you create a meal it is a form of expression of who you are and where you come from. Every time I eat Peni it reminds me of many different fond memories of my mother, because that was what she loved to make. She took pride in her cooking and because of it I also take pride in everything I cook.

Effects of British Colonial Rule in India - 4318 Words

Abtract The colonization of India and the immense transfer of wealth that moved from the latter to Britain were vital to the success of the British Empire. In fact, the Viceroy of British India in 1894 called India â€Å"the pivot of our Empire †¦Ã¢â‚¬  I examine the effects of the Industrial Revolution on the subcontinent. Besides highlighting the fact that without cheap labor and raw materials from India, the modernization of Britain during this era would have been highly unlikely, I will show how colonial policy led to the privation and death of millions of natives. I conclude that while India undoubtedly benefited from British colonial rule, the negatives for the subject population far outweighed the positives. . Colonialism, by definition,†¦show more content†¦Second, British India, which included today’s India, Pakistan and Bangladesh, was a region so large that there were areas in which Britain exercised direct control over the subject population and others where it exerted indirect control. It is exceedingly difficult, therefore, to extrapolate from one experience to another. Although it is impossible to determine how India would have developed had England never established a dominating presence there, I find the results of British colonialism to have been a mixed bag for India: the negatives, however, far outweighed the positives. Liberal and democratic aspects of British colonialism in India played a significant role in leading to a democratic South Asia following Indian independence in 1947. Yet, the British -- first through the East India Company and then through direct government control -- held almost all of the political and economic power in India during the Empire’s expansion and apogee, guaranteeing the Indian economy could not evolve and/or function independent of the ruling power’s control; ensuring raw materials extracted from Indian soil would go towards British manufacturing industries mostly without profiting the vast majority of Indians; and leading to lives of privation for millions of indigenous subjects. Although there have been arguments made that, in political andShow MoreRelated Imperialism And India Essay1091 Words   |  5 PagesImperialism and India nbsp;nbsp;nbsp;nbsp;nbsp;Throughout history, many nations have implemented imperialism to enforce their will over others for money, protection and civilization. India was no exception. Since its discovery, Europeans were trying get a piece of Indias action. 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Installation Art And Its Impact On Art - 2857 Words

INSTALLATION ART Installation art is living art which makes it relevant in our daily lives. It can be seen on display in communities, in business, in architecture, and in education. Additionally, it is pivotal in making a political statement as well as entertainment inclusively film installations, film and television productions. Installation Art did for art, what film did for photography, bringing life and movement into what would otherwise be still. Business use of installation art and the excitement it brings can be beneficial to the arts community while adding value to businesses that are inspired by, and those that inspire installation art. For example, an extensive company in Canada, Bell Media, was one of the major sponsors of the†¦show more content†¦Their work withspires creativity, vision, and unlimited possibilities. Because of Christo and Jeanne Claude’s work, â€Å"The Floating Pier† thousands of people can say they have had the experience of walking on the water. Yayoi Kusama provoked unique experiences and personal vision with her installation, while James Terrell challenges the natural connection with art and science. Each of their installations could be used in, and to inspire film production in unlimited ways. Christo and Jeanne-Claude, known as the â€Å"Wrap artist† are unique in their architectural scaled installations. They see art as an experience and empirical knowledge and have triggered a few documentaries. Therefore, film can be commissioned as installation art, as video installations are. Christo Vladimirov Javacheff was on June 13, 1935 born in Gabrovo, Bulgaria and his teenage was spent under communist precedence. Christo passed Art Academies in Vienna and Sofia. Significantly, Jeanne-Claude Marie de Guillebon (1935-2009) was born in Casablanca Morocco of French Parents. Uniquely, Jeanne-Claude was born the same day, month and year with Christo (June 13, 1935). 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Online Purchase Motivation Behaviors From Conscientious...

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General Motors with Lean Manufacturing Free Essays

string(132) " The TPS organizes manufacturing and logistics for the automobile manufacturer, including interaction with suppliers and customers\." General Motors with Lean Manufacturing An Introduction of GM Global Manufacturing System Operations Management Team Project Contributed by We Make A+ (sort by number): – 2009 050 444 – 2010 049 712 – 2010 054 149 – 2010 059 605 – 9125 620 120 Division of Business Administration, Hanyang Univ. ERICA Ansan, December 2012 Contents Part 1. Overview of General Motors2 1. We will write a custom essay sample on General Motors with Lean Manufacturing or any similar topic only for you Order Now 1 Why General Motors? 2 1. 2 Introduction of General Motors3 1. 3 Basic Information3 1. 4 History of GM4 1. 5 GM’s family4 Part 2. Introduction of Lean Manufacturing4 2. 1 Definition5 2. 2 Lean and TPS5 2. 3 Theme: Efficiency6 Part 3. GM’s Global Manufacturing System6 3. 1 Application of Lean Manufacturing6 3. 2 In-Progress Control and Verification7 3. 3 Process Failure and Effect Analysis11 3. 4 Quality Feedback/Feedforward11 3. 5 Quality System Management13 Part 4. Comments14 4. 1 Achievements beyond Efficiency14 4. 2 A Too-Lean GM? 15 Bibliography16 Part 1. Overview of General Motors 1. 1 Why General Motors? First automotive industry has started in 1885 since Karl Benz and Daimler develop gasoline engine cars. The early automotive industry was expensive ,slow and didn’t escape from the design of the wagon type. But The introduction of Henry Ford’s conveyor belt is way as to be able to mass-produced, it became the beginning of popularization. U. S. automotive company seek to enter into the world in Europe ,since 1920’s and by combining U. S.. ‘s car production technology and Europe’s brand value, Europe emerged as the largest market in the world. At the European economy will recover in 1950, U. S. has grown enough to occupy 80% in world market and Europe built a new product differentiation and diversification strategy in order to correspond to U. S. At this point should be noted that Japan’s inroad into world market. Because of Korean war, Japan laid the foundation of growth and The 1960’s, global automotive market is growing, Japan participate in global automotive market. Especially, Japan made new Labor-management relations by new industrial organization and distinctive production manner, and spreading Toyota production system and JIT approach to become more competitive, They were formed 3 polarized system to dominate the world market with U. S. and Europe. After that, Before and after the 1980’s, Asian countries, including countries such as Mexico and Brazil participated in global automotive market as a weapon low-income and small car. In 1990’s, U. S. lead global automotive market increasing core competencies by innovation to reengineering, benchmarking, restructuring, and downsizing, etc, competing with Japan. In the late 1990s, Automotive market undergo great confusion due to oversupply and changing consumer needs, and Multinational automotive companies’ M;A is greatly increasing, and a small number of large companies lead global automotive market. In the flow of the automotive industry, after establishment in 1908, GM lay the foundation focusing on to raise the size merging Buick, Cadillac, including 25 companies and maintain first in sales between 1933 to 2008. Also, in domestic, GM is known for a lot of familiar brands such as Chevrolet. Because GM overcome several financial crisis and still exist the center of the world’s automotive industry companies, we choose GM automotive industry companies, we choose GM 1. 2 Introduction of General Motors General Motors Company commonly known as GM (General Motors Corporation before 2009), is an American multinational automotive corporation headquartered in Detroit, Michigan, and the world’s largest auto maker, by vehicle unit sales, in 2011, employing 202,000 people and doing business in some 157 countries. General Motors produces cars and trucks in 31 countries, and sells and services these vehicles through the following four regional segments, which are GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO), and GM South America (GMSA), through which development, production, marketing and sales are organised in their respective world regions, plus as fifth segment GM Financial. 1. 3 Basic Information Industry – Automotive Founded – September 16, 1908 Founder(s) – William C. Durant Headquarters – Renaissance Center, Detroit, Michigan, the US Number of locations – 156 facilities on six continents Area served – Worldwide Product – Automobiles, Financial Service 1. 4 History of GM 1908| Founded by William. C. Durant| 1910-1929| The rise of the automobile captured imaginations and sparked invention. | 1930-1959| GM’s commitment to innovation lent optimism during tumultuous world events. | 1960-1979| GM offered forward-thinking answers to an increasingly eco-conscious world. | 1980-1999| The close of the 20th century brought tremendous global growth for GM| 2000-2008| Trying economic times saw GM embracing an enduring passion for innovation. Today| We are passionate about designing, building and selling the world’s best vehicles. This vision unites us as a team and is the hallmark of our customer-driven culture. | 1. 5 GM’s family Part 2. Introduction of Lean Manufacturing 2. 1 Definition What is lean manufacturing(lean)? Lean manufacturing, lean enterprise, or lean production, often simply, â€Å"Lean,† is a production practice that cons iders the expenditure of resources for any goal other than the creation of value for the end customer to be wasteful, and thus a target for elimination. Working from the perspective of the customer who consumes a product or service, â€Å"value† is defined as any action or process that a customer would be willing to pay for. Essentially, lean is centered on preserving value with less work. Lean manufacturing is a management philosophy derived mostly from the Toyota Production System (TPS) (hence the term Toyotism is also prevalent) and identified as â€Å"Lean† only in the 1990s. TPS is renowned for its focus on reduction of the original Toyota seven wastes to improve overall customer value, but there are varying perspectives on how this is best achieved. The steady growth of Toyota, from a small company to the world’s largest automaker, has focused attention on how it has achieved this success. 2. 2 Lean and TPS Lean is a management philosophy developed from the Toyota Production System (TPS) and identified as Lean in the 1990s. The Toyota Production System (TPS) is an integrated socio-technical system, developed by Toyota, that comprises its management philosophy and practices. The TPS organizes manufacturing and logistics for the automobile manufacturer, including interaction with suppliers and customers. You read "General Motors with Lean Manufacturing" in category "Essay examples" The system is a major precursor of the more generic â€Å"lean manufacturing. Taiichi Ohno, Shigeo Shingo and Eiji Toyoda developed the system between 1948 and 1975. Originally called â€Å"just-in-time production,† it builds on the approach created by the founder of Toyota, Sakichi Toyoda, his son Kiichiro Toyoda, and the engineer Taiich i Ohno. The principles underlying the TPS are embodied in The Toyota Way. TPS focuses on reduction of the original Toyota seven wastes  to improve overall customer value. But there are varying perspectives on how this is best achieved. 2. 3 Theme: Efficiency Lean manufacturing is a variation on the theme of  efficiency  based on optimizing flow. It is a present-day instance of the recurring theme in human history toward increasing efficiency, decreasing waste, and using empirical methods to decide what matters, rather than uncritically accepting pre-existing ideas. As such, it is a chapter in the larger narrative that also includes such ideas as the folk wisdom of thrift, time and motion study, Taylorism, the Efficiency Movement, and Fordism. Lean manufacturing is often seen as a more refined version of earlier efficiency efforts, building upon the work of earlier leaders such as Taylor or Ford, and learning from their mistakes. Part 3. GM’s Global Manufacturing System 3. 1 Application of Lean Manufacturing To be more competitive in the global automotive industry, General Motors is concentrated on some key priorities; get common; think lean and run fast; compete on a global basis; grow the business and most importantly-focus on the product. GM Manufacturing is dedicated to lean and common as demonstrated by a single, global manufacturing approach – a strategy that is changing the way it designs its products, lays out plants, selects equipment and design each assembly plant operator’s job. The GM Global Manufacturing System-or GMS-is an important building block of an integrated strategy to develop products that excite customers in markets around the world. 3. 2 In-Progress Control and Verification In-Process Control Verification includes the intent and purpose of the BIQ motto: â€Å"Satisfy your customer; do not accept, build or ship a defect! Solve problems through team work. † Quality expectations are achieved in each process to ensure defects are not passed on to downstream process. Well, it raises a question, how to achieve customer satisfaction? General Motors has three paths for solving this problem. In the first place, prevention avoids defects or non-standards occurring. Secondly, Detection—identify when defects or non-standards have occurred. At last, use containment to assure defects or non-standards are not passed on. I will introduce these three methods in the following minutes. The benefits of In-Process Control Verification consist of three aspects: * To external customers (people buying our vehicle), it protects customers from sub-standard vehicle quality; it assures customer satisfaction. To internal customers (downstream operation), it prevents major repair and rework by detecting a non-conformity early in the process; it prevents the flow of defects from department to department and station to station. * To internal customers (from suppliers), it protects Team Members from non-compliant parts from suppliers through advanced quality planning and prompt containment during spills. Prevention To understand t he prevention, let me show you a comparison at first. As you can see in the picture, Using the Lean approach, we control the process by prevention. It results in less rework and repair, and higher first time quality. By contrast, the traditional approach is trying to control the product, which is less efficient and more passive, with more rework and repair, and lower first time quality. Process Equipment Capability Reviews means periodic checks are conducted to identify trends or shifts in capability over periods of time. It includes four steps: 1) Identify process equipment with high risk/impact 2) Conduct initial capability confirmation 3) Conduct regular scheduled reviews to confirm capability 4) Implement corrective action as required Detection The second method is detection. Detection has two purposes. Purpose 1: To make non-standard conditions in the manufacturing process visible – identify when defects or non-standard have occurred. Purpose 2: This supports the â€Å"Do Not Accept† element of the quality motto: * Inspection process that confirms quality as soon as possible following manufacture * Measures the output of the manufacturing process * Alerts organization to out of standard conditions * Supports containment and provides input into continuous improvement Quality Check System Update: Internal/external ‘Customers’ are monitored for feedback. Where there is an indication of defect flow-out through the Verification process, a systematic analysis will be conducted; typically for: 1) Items currently not included in the quality check list/control plan For example, update check list based on prioritization and risk analysis. 2) Current check items not found during the check process For example, improve standardized work or re-train team members. The quality check system must be established in consideration of the ‘Supplier-Customer’ relationship. Inspection frequencies must be established by each ‘supplier’ that prevents shipping defects to downstream ‘customers’. This is a requirement for safety compliance items, key characteristics and for issues that will significantly impact the next process or customer. During a repair, the risk for a discrepancy to occur is increased – many aspects of the repair operation are non-standard. So the Independent Repair Confirmation is very necessary. Many aspects of the repair operation are non-standard: Any documented repair must be verified by Repair Confirmation (both on- and off-line) * Repair Confirmation must be conducted independently (e. g. by Quality). Standardized work (non-cyclic) should be used for the confirmation process – quality standards must be available. * Appropriate training and knowledge of standards must be developed to conduct or confirm repairs. * Repair confirmation should be as close to the repair process as possible. * Repair confirmation can be conducted by man or machine. Workers can use Andon(A Kind of Signboard) to Stop The Process: Work Station Team has the abi lity to stop the line and complete standardized work in station if there are some problems in the product line. If the Team Member has a quality issue within their standardized work they activate the Andon system to: * Initiate a call for help through station light, Andon board, and melody * Empower the Team Member to stop line organization responds to provide support * Stop at FPS (Fixed Position Stop) to contain and complete the repair * Where Andon is not available the principles still apply Alarm and Escalation Process: When a defect is detected, feedback to the appropriate team or individual will be given by using a communication system. The alarm is raised by using audio/visual signals (e. . Andon). The alarm process directs the support functions to: * ‘Go and See’ the problem * Apply containment to prevent further flow of defects * Initiate problem solving Containment Containment: the purpose of it is the achievement of customer expectations relies on a method to contain defects within the manufacturing process, and implement corrections to protect the next/downstream cust omer. This also supports the â€Å"Do Not Ship† element of the quality motto: * Vehicle delivery to the customer * Powertrain and MFD plants to vehicle assembly * External supplier to the manufacturing plant Internal departments (e. g. between body, paint and GA) * Between work stations within a department Summary of In-Process Control and Verification Standardized work is performed in every process and includes the required quality checks. Process control activities are implemented on equipment to control variation on a daily basis and maintain capability over a period of time. Detection confirms the manufacturing process and ensures both internal (Production Team Members) and External Customers (people who buy our products) are receiving products that meet or exceed the quality standards. A process is in place to contain defects within the manufacturing process and implement permanent corrective actions that are verified as being effective. 3. 3 Process Failure and Effect Analysis Purpose of this procedure: Investigation, documentation and if necessary reduction of the risk potential (Risk Priority Number-RPN) for all production processes. RISK PRIORITY NUMBER S x O x D = RPN * S = Severity * O = Occurrence * D = Detection * RPN = Risk Priority Number* * 1 = Lowest1000 = Highest There are some questions to answer for the Process Failure and Effect Analysis: Potential failure mode:What things have gone wrong? What things could go wrong? Effects of failure:What does a failure mean to the next operation, the assy plant, the final customer? Potential Cause of failure: Root cause what has gone wrong in the past Brainstorm what could cause failures? Current controls: What do we do today to prevent the defect from occurring and getting to our customer? Recommended actions: If current controls are not 100% effective, what actions should be taken? 3. 4 Quality Feedback/Feedforward Definition: The communication of quality expectations and results between customers and suppliers through standardized communication pathways. Purpose: To ensure that information on quality reaches those who need it. Feed Information Forward: Internal and external suppliers communicate known/potential problems and/or problem solving status to their customers in a timely manner. This provides the customer with sufficient lead time to react to upcoming changes and take appropriate measures. Feed Information Back: Internal and external customers communicate known/potential problems and/or problem solving resolution to their suppliers in a timely manner. This provides the supplier with sufficient lead time to react to customer issues and take appropriate measures. Build and quality status of each vehicle is communicated to downstream processes. Summary of Quality Feedback/Feedforward Feedback/Feedforward promotes the communication of quality expectations and results between customers and suppliers through: * Clearly defining customer/supplier communication requirements †¢Defining timing, content, and format of information †¢Establishing metrics and the subsequent management process †¢Effective implementation of the Feedback/Feedforward communication tools †¢Problem identification, input into the plant problem solving process and countermeasure follow up . 5 Quality System Management Who is responsible for Quality? Team work is absolutely essential to deliver world-class quality. Everyone! Quality is a shared responsibility Quality Function Resource Allocation: Manufacturing and quality resources are allocated to support the quality system and interface with engineering. Each area requires sufficient resources to properly fo cus on supporting production and driving continuous improvement through P-D-C-A. Resource allocation needs to consider the quality and production components that are required to support the team member. Development of an organization for quality incorporates the â€Å"Planning†, â€Å"Doing† and â€Å"Checking† functions into their structure. Summary of Quality System Management Quality System Management provides the supporting structure and framework for the implementation of the quality system and ongoing improvement to the quality of our products through: * Establishment and implementation of a strategic quality plan for the organization * Allocation of manufacturing and quality resources to support the quality plan * Development of an rganization for quality that incorporates the â€Å"Planning†, â€Å"Doing† and â€Å"Checking† functions into their structure * Identification of requirements for documentation, procedures, practices and assessments * Integration of both quality and manufacturing BPD’s at all levels of the organization Part 4. Comments 4. 1 Achievements beyond Efficiency The GMS is generating positive results. By us ing GMS, General Motors achieved efficiency in many aspects. And GMS is a system built around people. The system stresses the value of teamwork, and is based on an underlying philosophy that everyone, in every position, adds value. In an empowered environment, everyone’s experience and insights are valued. Manufacturing performance is improved through the consistent adoption of five principals-people involvement, standardization, built in quality, short lead time and continuous improvement. The principals are interrelated and implemented as a complete system. When implemented, the GMS principals maximize performance in the areas of people systems, safety, quality, customer responsiveness and cost. Products, plants and processes are designed to allow GM’s people to use their skills and abilities as efficiently as possible. GM is the industry benchmark in safety, a goal achieved through a strong partnership between GM and its unions. GM’s workers realize a healthy, injury-free environment. The team concept is a critical part of managing quality by making each team responsible for managing quality in their area. Team members receive extensive training in identifying and solving problems. GM’s manufacturing strategy maximizes customer responsiveness, by responding fast to customer and market trends. GM’s manufacturing system concentrates on cost savings by eliminating all forms of waste that detract from our ability to be competitive. 4. 2 A Too-Lean GM? It wasn’t that long ago that General Motors was producing too many vehicles. Now the giant automaker can’t produce enough for some area dealers, who said they are finding it difficult to keep enough inventory of some new car and truck models to satisfy demand. And they’re probably losing some sales because of it â€Å"I definitely believe it’s restricted† our sales, Scott Hatchett, managing partner of Scholfield Buick GMC, said Monday. GM’s efforts to emerge from bankruptcy a leaner company mean the inventory Hatchett and other dealers have access to has been much thinner, especially for certain models such as GMC Terrain as well as the Buick Enclave and LaCrosse. â€Å"We literally get down to where we have one or two of those vehicles in stock,† he said. Jill Hattan said her dealership, Don Hattan Chevrolet in Park City, has had a difficult time keeping in stock the Chevy Equinox and Camaro. â€Å"It’s just trickling in on top of a small inventory,† she said. â€Å"We are definitely missing some sales. Hattan said her dealership is trying to alleviate the lack of inventory from Chevrolet by tapping other dealers’ inventory. â€Å"We actually try to purchase several at a time just for stock but when everyone’s short, that’s not easy to do either,† she said. GM spokesman Tom Henderson said his company is â€Å"dramatically different† now than before it entered a brief bankruptcy in June 2009. It’s axed brands such as Saturn and Pontiac, closed plants and received $50 billion in aid from the federal government. Before GM’s bankruptcy â€Å"we typically ran with very high inventories,† Henderson said. As a leaner company, its production has been sharply trimmed. Now the company is attempting to find the sweet spot between production and demand. â€Å"It’s a really delicate balancing act,† Henderson said. Henderson said he couldn’t disclose production rates going forward. But he did point to efforts by the company to ramp up production on the GMC Terrain and Chevy Equinox. It has taken an unused portion of its plant in Ontario, Canada, to create capacity for the manufacture of 60,000 to 80,000 more vehicles. Those two midsize SUVs are hot sellers for GM. GM said earlier this month that through the first six months of 2010, sales of the Equinox and Terrain were up nearly 193 percent from the same period last year. Henderson said the company is listening to its dealers such as Hatchett and Hattan. â€Å"We take their input seriously,† Henderson said, adding that dealers should see this fall the results of GM’s increased production efforts at its Canadian plant. As for additional production increases, â€Å"We’ll judge based on business conditions what to do going forward. † Bibliography * [http://www. gm. com] * Womack, James P. ; Daniel T. Jones, and Daniel Roos. The Machine That Changed the World,1990. * Bailey, David (24 January 2008). â€Å"Automotive News calls Toyota world No. 1 car maker†. Reuters. com. Reuters. Retrieved 19 April 2008. * [http://en. wikipedia. org/wiki/Lean_manufacturing#cite_note-Reuters-3] * [http://en. wikipedia. org/wiki/Toyota_Production_System] * Strategos-International. Toyota Production System and Lean Manufacturing. * [http://www. autointell-news. com/News-2003/January-2003/January-2003-1/January-03-03-p6. htm], GM’s Global Manufacturing System – A System To Build Great Cars and Trucks. * Jerry Siebenmark, A Too-Lean GM? , 2010. How to cite General Motors with Lean Manufacturing, Essay examples