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Financial Management Theory

1. Much of financial management theory is based upon the assumption that individuals act rationally in their decision making. Text has noted several areas where the conclusion is that individuals do not act rationally. What is the implication of this conclusion on our understanding of traditional financial management.

2. How relevant is behavioral finance to investment management. First looking at the investors side and then from and investment advisors side.

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1. Much of financial management theory is based upon the assumption that individuals act rationally in their decision making. Text has noted several areas where the conclusion is that individuals do not act rationally. What is the implication of this conclusion on our understanding of traditional financial management?

ANSWER:
According to rational decision making model, there are several steps involved in coming up with decisions. It starts with the identification of a problem, followed by analysis of relevant factors and opportunities, and ends with actions to be taken on the decision made. This means that at the start of the process, the real problem should be correctly identified. This is to ensure that the next steps in the decision making process will also be correct. Another assumption here is that before a decision is made, relevant factors have been analyzed and possible alternative solutions have been identified and evaluated. After a decision has been made, the corresponding courses of action ...

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The solution discusses Financial Management Theory.

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