A STUDY ON ROLE OF BEHAVIOURAL FINANCE IN ACTIVE MANAGEMENT AND INVESTOR'S EMOTIONS

Most investors need to have a certain amount of money at a certain time, and they can afford to contribute a certain amount towards that goal. Clearly, managing investors to reach their goals requires understanding the individual and how they will react to volatility, uncertainly, or the latest news story. One important piece of the puzzle is developing an understanding of behavioral finance. In short, the discipline can help us understand that people are emotional creatures, prone to delusional bouts that produce over-confidence, fearfulness, confusion, and potentially impulsive mistakes or extreme reticence. This paper discusses the advantages of active management and the limitations of the argument related to active versus passive investing. Further, it defines the fundamental reason for portfolio management, which is meeting the investor's objectives—rather than beating the market. Importantly, it highlights the requirement to keep the investor's emotions in check, to help them avoid making decisions that will inevitably limit their ability to meet those objectives. Finally, it focuses on the role of active management in robust diversification.