To start with, we have three primary function of financial management – Investment decision , financial decision , and dividend decision . In the case of Investment decision, one has to decide on a capital investment proposal, whose net present value (NPV) is positive, and rate of return should exceed the marginal cost of capital. In the case of capital rationing, where the available capital is low , the investment proposal are selected, on the base of maximization of net present value. Further, those business plans, should be selected, as an individual project which should lead to an overall profitability of firm, enabling creation of wealth . Now, there are question on it ? The whole thing is dependent on human faculty of making decisions, by objectively looking at the facts, and analyzing the pattern. Obviously the question is of using the intellect, and creating right perception. However, often when an entrepreneur, develops a business plan, and moves to an investor, for making an investment decision, sometimes inside and sometimes outside the organization, he projects his thoughts on the entire planning process. The strength of his thought formation, can actually lead to an new form of reality . It could even change the perception of investor, and also influence the investment decision. This reflexive methodology, how individual with their thought projection , changes the reality is something could come in the domain of subjective finance . As, most decisions in real life both on the terms of capital investment proposal ( Investment decision ), and Capital allocation Proposal ( Financing decision on debt and equity ), and later Distribution of funds ( Dividend decision ), depends mostly on how an individual investor, or a collective investor, perceives the situation or potentiality of the proposal .
The reality of the fund allocation based on principles of financing management, of putting the funds in a situation , where the owners wealth, would be maximized, is a myth . As nobody knows, where and which forms of fund investment, allocation and distribution will maximize the wealth. They can predict, and the prediction will depend on the collective perception of the market, at that point of time . This collective perception of the capital investment proposal, is not always the reality of the capital investment proposal. It is how, the reality is perceived by certain group of people. For instance , the financial principle ,says that the liquidity available in the fund allocated in organization ,is reciprocal to the profitability of that fund at that point of time, in that organization . This do means that the fund, which is invested for a long period of time, has better changes of profitability. That’s how housing finance was seen as a most profitable area, as the funds are allocate for long term, and the available liquidity was low. But now with the housing prices depreciating , and the subprime crisis still there ,people are even questioning, about the reciprocal relation on liquidity, and profitability .
The root of any financial management is acquisition, ,maintenance and growth of the fund . There are process defined, for this objective, and one of the most significant process is to make right decision . Now, that is equally very subjective and depends on the psychological and the environmental condition, an individual is facing which will build his perception . Infact ,how he is comprehending his perception is also important . If he is seeing, around him, an widespread greed for wealth maximization, his comprehension, will be more reluctant to go the other way around . The agency theory points out, that managers are agents to shareholders, whom the shareholders give there power to make decision. So the power of decision making his very well distributed around the organization, at least in terms of theory. Though professional managers are expected, to move from higher interest , generally they are guided by self interest . Looking things from pragmatic point of view , if you have agents in the top of the financial institution , who is organizing the financial fate of people around number of nation ( given the fact that all these financial institution are present in number of nations), whose perception are deluded by self interest and greed , what kind of financial decision do you expect ? Don’t you think on such conditions a global financial crisis of this scale is a natural extension of a human psychological defect ?
Is it not the time, when we start talking about ‘subjective finance’ – which seems to be a very important of Ancient Indian Financial Schools of thought – based on Atharva Veda?
The subjective finance would be very different from behavioral where the characters of the financial decision maker could behave in according to certain policies ,but inwardly would sustain that ‘self interest and greed ‘. Behavioral finance could significant short term effects but not long term ‘character overhauling’ which the subjective finance could help . As it bring the real character of funds in front of humanity.