G02 - Behavioral Finance: Underlying PrinciplesReturn

The concept of individual rationality had been crucial in financial theory. The proponents of behavioral finance argue that investors act irrationally, resulting in financial market distortions, which are not spontaneously corrected. This paper focuses on behavioral biases representing and describing the violation of fundamental axioms of rationality in the investor behavior. Using a questionnaire survey, this article examines the investor's six most common behavioral biases, their impact on the individual decision-making process and in the end formulates recommendations to eliminate their influence.

The article is a discussion to the Libby and Brown's article: Financial Statement Disaggregation Decisions and Auditors' Tolerance for Misstatement. The first part of the article describes the original research of the authors, including theoretical base, experiment and its conditions and results of the research. The second part presents the strengths and weaknesses of the article and offers way for future improvement. The last part adopts the results of the research on the Principal - Agent Theory in the assurance services.

The article deals with the principal-agent theory and its application on provision of the assurance services. It describes influence which the principal-agent theory might have on the quality of information provided by the assurance services. The article defines stakeholders and shareholders of a company and their role in relation to provision of the assurance services, and then briefly presents the principal-agent theory. The influence of the principal-agent theory on the assurance services is ultimately studied in two ways, based on whether the subject who ordered the service is the main user of the provided information, or not. The agency costs are analyzed taking into account the amount of materiality and the amount of differences which are mentioned in management letter.