Financial Theories

Introduction Corporate governance is the system by which companies are directed and controlled. Traditional corporate governance theory has long focused on agency theory, stakeholder theory, and resource dependence theory. However, these frameworks often assume that decision-makers are rational actors. In reality, human behavior, biases, and cognitive limitations significantly shape corporate governance outcomes. This is where […]

As someone deeply immersed in the world of finance and accounting, I have always been fascinated by the intersection of human behavior and corporate financial decisions. Traditional corporate finance theories assume that managers and investors are rational, always making decisions that maximize value. However, in my experience, this is rarely the case. Behavioral Corporate Finance

Introduction Making financial decisions requires rationality and logic, but human psychology often interferes. Investors, policymakers, and business leaders frequently fall victim to behavioral biases that distort their decisions. These biases arise from mental shortcuts, emotions, and cognitive limitations, affecting how people interpret information and respond to financial markets. Understanding these biases is essential for making

Introduction The efficient market hypothesis (EMH) suggests that asset prices fully reflect all available information, making it impossible to consistently achieve excess returns. However, in reality, markets do not always behave rationally. Investors often make decisions influenced by cognitive and emotional biases, leading to deviations from expected outcomes. These deviations are termed market anomalies. This

Introduction Investors often assume they make rational decisions based on available information and logical analysis. However, research in behavioral finance suggests that psychological biases significantly impact investment choices. Understanding these biases helps investors recognize their own irrational behaviors and make better financial decisions. In this article, I explore the theory behind behavioral biases and investment

Introduction Financial forecasting is the backbone of investment decisions, corporate strategy, and economic planning. It involves predicting future financial conditions based on historical data, statistical models, and economic indicators. While forecasting techniques have evolved significantly, errors persist due to inherent human biases. Behavioral finance explores how psychological factors influence financial decision-making, leading to systematic errors

Introduction The traditional asset pricing models, such as the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT), assume that investors act rationally, markets are efficient, and asset prices reflect all available information. However, in reality, investors exhibit cognitive biases and irrational behavior that affect asset prices. The Behavioral Asset Pricing Model (BAPM)

Introduction Financial risk management is a crucial discipline in finance that ensures businesses, investors, and individuals can navigate uncertainties effectively. In this article, I will explain the fundamentals of financial risk management and its relationship with probability theory. Understanding these concepts is essential for making informed decisions in financial markets, managing business risks, and optimizing

Interest is a fundamental concept in financial economics. It lies at the heart of most financial decisions, whether you’re borrowing money, lending it, or investing. I’m going to walk you through the basic theory of interest, breaking it down into simple terms and making sense of the numbers, concepts, and mechanics involved. By the end

Bargaining power, a term frequently discussed in the fields of economics, business, and negotiation, plays a significant role in determining the outcomes of various transactions and agreements. At its core, bargaining power refers to the ability of one party to influence the terms of a deal or negotiation in their favor. In this article, I’ll