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Behavioral Finance at JP Morgan Case Solution
JP Morgan is the largest financial holding company in the world that provides a wide variety of financial products and investment banking services to its clients. The products and services offered by the company range from corporate strategy formation, raising financing through debt and equity issuance, innovative hedging securities and derivatives including forwarding contracts, swaps, and options. The company is based in more than 50 countries and has access to assets worth $1.3 Trillion.
The company is currently conducting its operations in the following segments. Customer and Civic Banking which also involves the trading of financial instruments and securities, Asset Management and Commercial Banking, Investment banking corporate financial services. The company is organized into three brands. Investment Banking and Asset wealth management come under the brand of JP Morgan, Security and treasury operate under the brand of JP Morgan Chase and finally commercial and retail banking services offered by the bank under the Chase Brand. The company has gone through several mergers and ended up being the leading financial services provider in New York.
Following questions are answered in this case study solution
How is JP Morgan structured as an organization? What are the roles and responsibilities of its various arms?
Critically evaluate the behavioral finance approach and products of JP Morgan. What are the critical success factors?
What might be the challenges JP Morgan face when implementing the behavioral approach in Japan?
Case Analysis for Behavioral Finance at JP Morgan
Roles & Responsibilities
As described earlier, the company has four brands having different roles and responsibilities based on the segment. The JP Morgan Brand includes investment banking and asset management. The key responsibility of investment banks is to provide consultation regarding decisions related to merger & acquisitions, raising capital through debt or issuing equity, restructuring, taxation and risk management.
The investment bank also has the role of the underwriter in case of the initial public offering. The derivative instrument is also managed by investment banks. Asset and wealth management segment offers wealth management services clients ranging from companies, individuals, government, financial institutions, and middle-market companies and municipalities. This segment manages the assets through business units including private banks and private client services. The segment offers asset management services that incorporate money market funds, multi-asset investment management, and fixed income.
The JP Morgan Chase brand provides treasury and security products, prime brokerage, liquidity, and working capital management to a global client base. In addition to that this brand has the responsivity of offering trade finance such as a letter of credit, commercial cards, and merchant services.
The Chase brand was responsible for providing commercial banking services which include offering treasury services, corporate investment management such as capital budgeting, investment appraisal to multiple clients including nonprofit organizations. The retail segment under this brand offers credit cards to consumers which makes JP Morgan the largest credit card issuer.
2. Critically evaluate the behavioral finance approach and products of JP Morgan. What are the critical success factors?
The origin of behavioral finance at JP Morgan comes from London. The company has invested more than half of its assets under management in stocks that are not based in the US. These assets worth around $76 Billion. The principles used in the funds which were based in the UK are UK strategic Value and UK Dynamic.
The abilities of stock outperforming the market does cannot be explained only by the risk. Based on human psychology the company focus on two biases based on human behavior, overconfidence and loss aversion. Both these biases played an important role in deriving the investment decision being insistent and inescapable. These biases convince investors to take such actions which then derive the stock prices.
The overconfidence bias makes individuals take decisions based on the thinking that their decisions are better than others. Hence, they buy such stocks that enable them to earn short term returns. This goes against the strategy to ling term profits or value investing. Consequently, the overconfident investors end up trapped in short term return stock and they face difficulty in buying systematic stocks that give the persistent return.
The JP Morgan fund managers put more emphasis on the stocks that give persistent returns and outperform the market in a longer period of time. Avoiding the overconfidence bias, the company has been able to find the stocks that are out of fashion and show positive results systematically.
The loss aversion bias is defined as the tendency of people to take decisions abruptly that allow them to take pride and enable them to avoid regret if that decision was not taken. That is why most people end up selling their stock once it goes up. These concepts allow JP Morgan to separate the stocks that are not performing well now but have performed tremendously in the past. The investment philosophy at JP Morgan incorporate these biases in choosing their investor and portfolio and concluded that this long term affects the market performance of the stock.
The factors that determine the success of behavioral finance at JP Morgan include their ability to pick stocks that have both value and momentum that gives long term performance.
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