3 Pillars of Thought- Traditional Finance, Behavioral Finance, Values-Based Finance (2024)

FAQs

What are the three pillars of finance? ›

The three core pillars of finance management are Capital Management, Month-end Reporting, and Cost Management.

Behavioral finance consists of three themes: (1) heuristic‐driven bias; (2) frame dependence; and (3) inefficient markets.

Everyone has four basic components in their financial structure: assets, debts, income, and expenses. Measuring and comparing these can help you determine the state of your finances and your current net worth.

The five pillars of financial planning—investments, income planning, insurance, tax planning, and estate planning— are a simple but comprehensive approach to financial planning.

You can think of these as three legs of a stool. These three pillars of Marketing, Sales and Service; they don't just stand by themselves. They lead to something. They stand to serve a greater purpose.

Basel II is the second of three Basel Accords. It is based on three main "pillars": minimum capital requirements, regulatory supervision, and market discipline. Minimum capital requirements play the most important role in Basel II and obligate banks to maintain certain ratios of capital to their risk-weighted assets.

And yet, there is no dearth of investors making irrational decisions. Clearly, something else is at play here – cognitive bias and limits to arbitrage. These are the two pillars of behavioural finance. Both offer answers to how emotions and biases affect share prices and financial markets.

The key concepts in behavioral finance, such as bounded rationality, heuristics, prospect theory, mental accounting, and biases like overconfidence, confirmation bias, and loss aversion, highlight the irrational financial choices people make, deviating from the assumptions of traditional finance models.

Now that you have been familiarised with the basic concept of behavioural finance, let me introduce you to the four major themes of behavioural finance: over-confidence, financial cognitive dissonance, regret theory and prospect theory.

These elements, often referred to as the four pillars of modern financial management, include planning, budgeting, risk management, and the automation of financial and business processes.

What are the main pillars of the financial sector? ›

banks, the goods market, and the labor market. foreign exchange market, the bond market, and the government. The three major pillars of the financial sector are the: stock market, the labor market, and the bond market.

Pillar 1: Definition: Use of proceeds. Pillar 2: Selection: Process for project evaluation. Pillar 3: Traceability: Management of proceeds. Pillar 4: Transparency: Monitoring and reporting.

Behavioral economics is the study of the psychological, cognitive, emotional, cultural and social factors involved in the decisions of individuals or institutions, and how these decisions deviate from those implied by classical economic theory.

These ideas (overconfidence, loss aversion and self-control) are foundational concepts in behavioral economics today. More recently, behavioral economics has early roots in the work of Israeli psychologists Amos Tversky and Daniel Kahneman on uncertainty and risk.

Although this field of research is extremely extensive, we can summarize three key insights from behavioral economics that apply to most economic models: (1) People aren't always rational, (2) People care about fairness, and (3) People are inconsistent over time.

Behavioural finance focuses upon how investor interprets and acts on information to take various investment decisions. In addition, behavioural finance also places emphasis on investor's behaviour leading to various market anomalies.