Insights From Behavioral Finance: Parameter Uncertainty

Although behavioral finance may at first seem to be far removed from the kind of rigorous analysis required by the discipline of value investing, it is actually at the core of what value investing is all about. After all, one of the central tenets of behavioral finance is that humans are not mechanical utility maximizers, whose actions can be predicted by models that presuppose rational action. Rather, they are subject to a wide range of emotional and cognitive biases, a topic that we have explored previously.

Fuzzy models

This sentiment is quite similar to classic value investing metaphors such as “Mr. Market” and the concept of irrational exuberance. Indeed, value investing presupposes the market can be highly irrational at times, as this is what allows diligent practitioners to pick out undervalued stocks. Another key insight from behavioral finance is that of parameter uncertainty – the inherent fuzziness of financial models.

The implications of parameter uncertainty are twofold. First, it makes it very difficult to put an exact number on what the value of a business should be. Now, for most value investors, this is not a big issue. For instance, Charlie Munger (Trades, Portfolio) has often said he greatly prefers to have a range of possible values for a business, rather than a specific number.

There are many reasons why this is preferrable. For one, it is easier to do. For another, it enables an investor to establish an adequate margin of safety. And finally, it is simply the more intellectually honest thing to do. With this in mind, the exact price targets set by so many sell-side analysts begin to look suspicious. Exact numbers convey certainty and authority, which is why they appeal to so many people. But they are no better, and are often far worse, than ranges. By tying ourselves to exact targets, we narrow our margin of error and open ourselves up to a greater possibility of being wrong.

The categorization problem

The second implication of parameter uncertainty concerns the problem of categorization of investment targets. In a world where corporations are based in many different countries, how does one ascertain the risk associated with any given company? In 1990, Robert Reich, who would go on to be U.S. Labor Secretary from 1993 to1997, wrote an article in the Harvard Business Review titled, “Who Is Us?” which examined this exact question. Is a U.S.-based and listed company that conducts most of its business in the developing world more representative of the U.S. market than a foreign company that primarily employs American workers? Which is riskier?

The truth of the matter is different individuals and institutions will pick their own definitions for these things. Moreover, they will have to grapple with problems like whether Amazon (NASDAQ:AMZN) is a cloud computing company or a retailer and whether or not China should still be considered an emerging market. Of course, each will come up with their own answers. The problem is when so many different market participants have different ways of viewing the world, it is somewhat difficult to build reliable predictions of how they will react in the future.


Behavioral finance has a lot to offer value investors. While traditional thought holds that all market participants share broadly the same goals, outlooks and decision-making calculi, the truth of the matter is all of this is incredibly subjective. Parameter uncertainty is a particularly good example of this as it touches on so many different aspects of investing. As investors, there is no way to overturn uncertainty – so the best thing to do is embrace it, not ignore it.


Finance Minister Arun Jaitley Critiques Sovereign Wealth Fund Popularity

Finance Minister Arun Jaitley Reviews Sovereign Wealth Fund Status

New Delhi: A panel headed via Finance Minister Arun Jaitley on Wednesday took stock of the developmentmade on operationalizing National Investment and Infrastructure Fund (NIIF), India’s maiden sovereign wealth fund, including choice of its CEO and projects shortlisted for making preliminary investments.

The second Governing Council assembly of the Rs 40,000 crore National Funding and Infrastructure Fund (NIIF) additionally mentioned the comply with-up motion being taken at the memorandums of knowledge(MoUs) signed with Rusnano of Russia, ADIA of Abu Dhabi and the Qatar Investment Authority.

“The Governing Council turned into apprised of the interactions that have been held with a big variety oflong time traders, Sovereign Wealth Price range, Pension Finances from throughout the globe, in search of to make investments inside the NIIF,” a Finance Ministry declaration stated.

In addition they mentioned the pointers for Investment of the corpus of NIIF, inclusive of the Investmentcoverage, it delivered.

Installation in December 2015, NIIF will act as an Funding car for funding commercially possible greendiscipline, brownfield and stalled initiatives.

The government is in the system of appointing a CEO for NIIF, in which it holds forty nine in line with centat the same time as the relaxation may be held with the aid of personal buyers.

The Council changed into also apprised of the refinement in the structure of NIIF pursuant to discussions with investors.

NIIF will have diverse sectorunique or investor-precise close ended Funds and they would troublediverse instructions of gadgets. authorities in conjunction with different investor(s) will join thegadgets of diverse Budget.

“The Reputation of projects shortlisted for initial Funding by using the NIIF and the choice manner ofLeader Government Officer were additionally placed before the Council,” the ministry said, adding that awebsite for NIIF become launched on Wednesday.

This assembly became attended by way of Financial Affairs Secretary Shaktikanta Das, MonetaryOfferings Secretary Anjuly Duggal, Nation Financial institution of India chairperson Arundhati Bhattacharyaand former Infosys director T V Mohandas Pai.
Story first published on: June 09, 2016 00:02 (IST)

Tags: Arun Jaitley, Country wide Investment and Infrastructure Fund, NIIF, sovereign wealth fund

India Funding Roundup: A School Bus Tracking App, Robo Finance Advisor, and More

India Funding Roundup: A School Bus Tracking App, Robo Finance Advisor, and More

Our latest funding roundup compiles seed stage investments in Indian startups engaged in vehicle tracking, on demand concierge services, healthcare, EdTech, FinTech, and more.

Gurgaon-based on demand concierge service Qlivery, run by invexGO Solutions Private Limited, has raised $230,000 (roughly Rs. 1.5 crores) from Hong Kong-based Swastika Company Limited. The startup plans to use the funds to expand the team, geographical reach and add customers. A substantial amount of current fundraise will be used to improve the technology stack, including implementation of artificial intelligence, said Rohit Pansari in an emailed statement.

School bus tracking app AppAlert has raised $900,000 (roughly Rs. 5.9 crores) in its seed round of funding, led by Narinder Singh, a US-based serial investor. The funding secured will be deployed to build and enhance the core application and to expand its service offerings in markets of Singapore, Indonesia, Philippines, and Australia, the company said, adding that it has kicked off trials at more than 20 schools in NCR and Mumbai.

Pramati Care
New Delhi-based healthcare services startup Pramati HealthCare, which provides caretakers for patients at home has reportedly raised $200,000 (roughly Rs. 1.3 crores) in Pre Series A round of funding. The startup is currently offering services in Delhi NCR region.

Avagmah Bengaluru-based EdTech startup Avagmah reportedly raised an undisclosed amount of funding from Kris Gopalakrishnan, Co-Founder and Former CEO of Infosys, and Atul Nishar, Founder of Hexaware, and existing investors. The startup provides a combination of cloud-based SaaS (software-as-a-service) technology to universities for increasing the reach and appeal of their programmes.

Mumbai-based healthcare player Healthenablr has reportedly secured $800,000 (roughly Rs. 5.3 crores) in a new round of funding from undisclosed investors. Currently operational in Mumbai, Kolkata and Bengaluru, the startup provides apps for Android and iOS which can be used to chat or have a video consultation with a doctor, or even book an appointment.

Bengaluru-based Buildwealth Technologies has reportedly raised $250,000 (roughly Rs. 1.65 crores) in angel funding from a group of angel investors. The robo advisor’s investment algorithm in mutual funds is based on a process called Capital Asset Pricing Model, proposed by Nobel Prize-winning economists.

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Tags: AppAlert, Apps, Avagmah, Funding, Healthenablr, Internet, Investment, Pramati Care, Qlivery, Startups, Wealthy

Chennai Angels invests in Finance Buddha

Finance Buddha raised its first round of external funding and is slated to disburse more than <span class='WebRupee'>Rs.</span>1,000 crore loans in the current financial year.

Finance Buddha raised its first round of external funding and is slated to disburse more thanRs.1,000 crore loans in the current financial year.

Chennai: The Chennai Angels (TCA) on Friday said that it has invested an undisclosed amount in Finance Buddha, a financial services firm.

“There have been many start-ups in the fintech space, but what excites me about FinBud is the quality and thinking of the entrepreneurs, which is informed by their extraordinary domain competence and fantastic execution skills. Unlike unidimensional start-ups, this business has scale as well as technology,” said Shankar V, who led the investment from TCA.

Finance Buddha is a three-year-old company for financial service products- personal loans, unsecured business loans, home loans, loans against property and insurance.

“This pre-series A round of funding will be used to further develop our technology platform which will be integrated with various stakeholders in the loan origination, underwriting and disbursal process,” said a statement from the company.

The company, which raised its first round of external funding, is slated to disburse more than Rs.1,000 crore loans in the current financial year.

The financial services firm said it aims to make the entire loan process paperless and one where a customer can get instant approval, without compromising on the underwriting and verification process.