As the world continues to develop and people embrace globalization, there is an intense need to increase ethical practices in business. Ethical practices are mainly moral principles that guide an individual’s activities when performing their duties. Going against the practices is not necessarily prosecuted, but they should be strictly followed to gain trust and woo most customers (Boddington, 2017). Although ethical practices vary from company to company and country to country, there is a pressing need to adopt universal codes of ethics, especially for financial advisors. It is, therefore, important for financial advisors to follow a globally accepted code of ethics because they enhance integrity and business honesty and promote global professional standards.
Importance of Following a Globally Accepted Code of Ethics
A code of ethics promotes ethical conduct such as enhanced integrity, and business honesty, among others. However, financial advisors play an important part in the success of the business. They can help the business to achieve its desired goals or perish if the financial advisors misadvise the organization. Usually, clients disclose their financial performance to their advisors, and they are required not to disclose the performance of their customers (Boddington, 2017). Furthermore, they handle the most crucial information of the company; hence they are required to maintain the utmost secrets of the company that entrusts them with their finances. As a result, financial advisors need to follow international codes of ethics, which often encourage honesty and integrity with clients.
Additionally, following a globally accepted code of ethics benefits the potential clients of their advice by establishing and promoting worldwide professional standards in consultancy. Financial advisors are always confronted with their clients, and therefore they are required to uphold high standards of professionalism (Boddington, 2017). In addition, through the globally accepted code of ethics, the financial advisors agree to uphold and promote the interest of the financial resources for the benefit of the business. In other words, they provide appropriate disclosure without developing self-interest over the resources of the company. Therefore, the clients associated with the advisors guided by the globe code of ethics should benefit as their interests are given priority.
With the increase in globalization and technology, people are currently investing in the share market. Although some deem it a challenging business, for others, it is an opportunity to engage in global business and make more profits. Share markets attract businesses of all kinds, especially those that are well established. Therefore, success in such a market requires critical analysis and prediction of changes in the shares. Therefore, such a business is highly affected by behavioral heuristics. Although behavior can also help the investor make profits, it can tremendously hinder the success of share market investing. Even though numerous behavioral heuristics affect the success of the business, overconfidence, regret, and chasing trends are some of the heuristics that adversely affect the success of share market investing.
In simple terms, overconfidence can be defined as being too confident. People can exhibit this kind of behavior heuristic without even knowing it. In short, overconfidence is exhibited when an individual feels that they know more than any other person in the field, and this is usually a mistake that many people perform. It is human nature that is, at times, crucial in making some aspects of decisions. However, it is a destructive behavior in share market investing. This is mainly because, in shares, there is always uncertainty about the future. As a result, it requires patience and critical analysis to ensure that an investor ventures into a market share that will not lead to loss-making. However, overconfidence can create a loss-making scenario.
Overconfidence behavior has two main components that, when overlooked, can affect profits; the quality of the available information and the ability to respond to the information promptly to gain maximum profit. Share market investing requires adequate information and determining when to act on time. In other words, time and information are critical to success in share marketing. This is mainly because the uncertainties of the shares make it unpredictable, and therefore, the investor should know the right time to sell and buy the shares.
Miscalculation of time and misinformation can lead to losses; however, overconfidence inhibits individuals’ ability to internalize information and act on time because they believe they know it all. According to Zahera and Bansal (2018), overconfident traders frequently engage in trade activities, but they fail to diversify their portfolios in inappropriate ways. This implies that they will trade shares daily and will incur losses.
There are several instances that support the notion of overconfidence. For example, a study conducted by Filbeck et al. (2017) asserts that there is a likelihood of loss-making with frequent investments. In their illustration, Filbeck (2017) analyses different traders across the US who were mainly dealing with brokerage firms. In the study, the researcher discovered that the purchased stocks accumulated losses after settling the tax losses. This implies that the more active a retailer invests, the less profit they make. In other words, the traders are paying to lose money. However, frequent investing is mainly triggered by overconfidence. In short, overconfidence hinders success in share market investing.
Regret is another behavioral heuristic that can hinder success in share market investing. Similar to confidence, every human has experienced regret. It can be witnessed in the previous bad decisions, poor actions, or even the losses that occurred previously. In share market investing, regret can give personal financial resources, time, and money to avert regret over an initial action. This can exceed the value of the investment, hence hindering the success of venturing into market share. In other words, regret prevents the acceptance that a bad investment was made, and it encourages the investor to correct the bad decision by investing more resources. In other words, holding to losses made in previous initiatives can lead to destructive regret bhava our, which can further plunge the business into a financial crisis.
As human beings, it is common to fight the feeling of regret, which makes people sometimes go to the greatest lengths, which can be illogical, to avoid a regretful situation. According to Fama (2021), share market investors are more likely to sell a winning position too early while losing a position too late to avoid regretting the accumulated gains or the capital cost invested in the shares. In other words, regret can make investors sell their shares early before it accumulates maximum value, hindering profit-making. Additionally, regret can make an investor hold on for a long time when a share is losing value with the hope of improvement. Therefore, regret is a behavioral heuristic that hinders the success of market share investing.
Driving behavior is probably a difficult heuristic to detach from as a human being. However, according to Zahera and Bansal, R. (2018), chasing trends is arguably the strongest behavior that can lead to the downfall of a market share investment. Even though previous studies indicate that former financial performance can not be used to determine the future value of a share, chasing trends makes businesspeople believe that they can predict the future value by analyzing the past. As a result, they end up incurring unexpected losses being that the share market is unpredictable.
Investors have an outstanding talent for determining market patterns, and they often believe in their validity. However, they often forget that the previous patterns are already priced, yet the future patterns are unknown. They, therefore, act on the patterns which often mislead their perception. Even if the pattern proves correct, Zahera and Bansal (2018) illustrate that the share market is often random, an admission the traders fail to believe. Therefore, investors who anchor their decisions on previous performances in the share market often perform poorly compared to their other counterparts. However, such investment is triggered by the chasing trends behavior.
In conclusion, the success of share market investment can be hindered by chasing trends, regret, and overconfidence. Although everybody experiences these behaviors in one way or another, they should be suppressed when investing share market. For instance, overconfidence can lead to losses when an investor hastily invests in the market without critically evaluating the available information and acting within a given time. Nevertheless, regret can make an investor keep holding on to a loss-making venture with the hope of gaining value. Furthermore, the investor can also sell the profit-making share before it fully gains its maximum value.
Finally, chasing trends, however, makes the investor use the experience to predict future patterns, which can lead to heavy losses as the share market is often uncertain. Therefore, for an investor to succeed in the share markets, they have to shelve the above three discussed behavioral heuristics.
Boddington, P. (2017). Towards a code of ethics for artificial intelligence. Springer.
Filbeck, G., Ricciardi, V., Evensky, H. R., Fan, S. Z., Holzhauer, H. M., & Spieler, A. (2017). Behavioral finance: A panel discussion. Journal of Behavioral and Experimental Finance, 15, 52-58. Web.
Zahera, S. A., & Bansal, R. (2018). Do investors exhibit behavioral biases in investment decision-making? A systematic review. Qualitative Research in Financial Markets, 10,2, 211-240. Web.