Safe Haven Asset and Investor Behavior under Uncertainty Essay Example
Safe Haven Asset and Investor Behavior under Uncertainty
Safe Haven Asset and Investor Behavior under Uncertainty
There is uncertainty that surrounds or that directs the behavior of investors in the current economic world. Economic changes are brought about by extreme use of finances on wars, fighting terrorism, fighting corruption, and in analyzing the pedagogies that underlie the current markets. Investors are most threatened when they can not accurately determine or forecast the changes in the exchange market (Baur & McDermott 2012). When investors receive or detect ambiguous signals unexpectedly, they end up buying gold with hopes that they will be able to maintain their value in the markets when variability return to norm. With regard to these aspects, investors become ambiguity averse.
Market changes occur periodically and they may change over time and space. Changes occurring in one country may be totally different from the other state especially when there are periodic unmonitored variations in price changes on commodities, labour, and in undertaking transactions (Baur & McDermott 2012). Overreaction to ambiguities occurs when the market prices and exchange rates are plummeting or rocketing. When positive changes occur, the investors tend to infiltrate the market with a variety of options to take. In most cases, the investors opt to buy shares and diversify their networks with intentions of making profit, and sustaining their businesses in the two faces of the economic coin.
It is a hard task and complex entity when an investor fails to predict and monitor changes if he or she lacks an economic scrutinizing eye (Baur & McDermott 2012). This has a high probability of occurrence among investors who do not have records, prediction models, and capacity to analyze the trends in the market. Long before, market rates remained constant but the same has aspects has changed over time such that, there are sudden and unpredictable changes that can occur without giving economic warning signals or indication (Baur & McDermott 2012).
Due to global influencing factors, investors have been unable to neither detect the exact changes nor determine the extend which their businesses will be affected or crippled (Baur & McDermott 2012). Undue changes in the global market are the major drawback that leaves many investors with mouths open. Since 2011, there have been global changes that have resulted to negative variations in the exchange rate market (Baur & McDermott 2012). Economic credit crunch has precipitated the global economy and its effects worsen when it is integrated with the effects from the global financial crisis that is currently waving and rearranging the nature of the global market.
Geopolitical variations and bank failures have shaped the world and their effects are continuously affecting the world economy. War related and political issues that have in the recent years occurred in North Africa, Middle East, and Middle Asia have affected the global market rates and their effects or impacts can not underestimated whatsoever. Investors would always look for anything to venture or to register with as long as it offers security to their businesses. Traditionally, many investors looked upon buying gold as security because it has a high value compared to anything else (Baur & McDermott 2012) However, there is epistemological aspect that restricts or limits them to understand the true nature of the market. Financial turmoil is a strong and a dangerous force that undermines efforts of investors in making profit or progress in their businesses. This calls therefore for a re-evaluation of the approaches that investors should use in order to cope up with the undue changes and variations in the market.
Significantly, investors should re-evaluate their means to cope up with simultaneous changes that occur during when the changes occur in the investor market arena. Various assets are affected more than others especially where they have been identified to have interdependences (Baur & McDermott 2012). The increased and the rocketing changes that occur during this encourages or has given investors a big challenge of looking after assets that are less affected during the financial turmoil periods or which will move with little tandem. Risk and uncertainty have two different effects to investors because; risks can be calculated and estimated by investors. It therefore means that, investors get prepared to deal with risk much more easily because they can forecast the changes that may occur along the business way (Baur & McDermott 2012). On the other hand, uncertainty leaves investors undecided because they can not estimate or approximate the extend to which their businesses may get affected. An overlapping nature of the predicted outcomes leaves the investors undecided and unconditioned to manage the changes (Baur & McDermott 2012).
Skilled businesses have however been able to use standardized economic models that help them to make concrete decisions. The models compares the known risks against the most probable trade-offs. The models assist the investors to reach or decide on optimal allocations or on optimal way forward (Baur & McDermott 2012). Investors are left to choose on the most optimal option but this depends upon the preferences of the investors, and attitudes to the risk. It has been noted over time that emotions and sentiments among the investors can influence the investors during the model choice selection especially under the Knightian uncertainty.
It becomes worse when powerful emotions take control of the investors in the selection of economic models (Baur & McDermott 2012). In today’s world, investors have deviated from the standard and rational frameworks and instead, they have adopted other techniques to maximize utility of their assets. If behavior of investors change from time to time, then it is possible to predict the changes in the market that are correlated with the changes in human behavior. Buying bonds is economical safe if they can give sustainable and overwhelming returns if they are kept to maturity.
However, use of gold may supersede bond approach because bonds are subjected to ore riskier threats that include inflation, default risk and currency risk (Baur & McDermott 2012). Use of gold as a safe haven is currently not part of safe investment because it is associated with a lot of uncertainties that can not be explained much earlier or without consistently referring to the ambiguous aversions. It is impossible for an investor who uses gold to determine the changing financial patterns while it can be very easy for the other investor to note the changes in financial patterns. The reaction rockets when gold is used as a haven commodity while it is low and observable when bonds are used as haven assets (Baur & McDermott 2012).
The best way to accommodate the global market changes will be to make keen observations in a gradual controlled manner so that a conclusion drawn from empirical observations is drawn. Use of gold during times of uncertainty has benefits and it has been used successfully from the past. It is a symbol of currency value and as a symbol of durability. In addition, it is a tangible asset that can be valued and it is realized that gold market can easily be understood and conceptualized than the others (Baur & McDermott 2012). Using gold has implications but when it is compared to others, it can serve as a safe entity in financial management scenarios. So far, an integration of gold and risk diversification approaches can save investors from other impacts that can shock markets at any given time or unexpectedly (Baur & McDermott 2012).
Baur, D.G., & McDermott, T.K.J. (2012). Safe Haven Assets and Investor Behavior Under Uncertainty [pdf] Available at: <http://www.finance.uts.edu.au/research/wpapers/wp173.pdf > [Accessed 28 September 2013].
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