Rational risk pricing helps the investors for charging higher rates of interest to the consumer involving less chances for repayment of loans on time and in full. There can be lower rates of interest to consumers for repayment of loans on timely basis and in full. Financial institutions deal with the utilization of rational risk pricing with the current customers. Rational risk pricing cannot be considered as the only factor affecting the rate of interest. The rate of interest is also on the basis of factors not under control, such as the overall economic scenario and the prime rate (Montone, 2012). Even the borrowers of maximum credit- worth are within the scope of paying higher rates of interest if the prime rate ends up going beyond the economic recession. Diversification by effective construction of portfolio allows the mitigation of risk while spread across a number of factors. Overconfidence not only ends up affecting prices and financial markets, but individuals as well loss of money and mistakes in investment.
Capital requirement based on risk is a rule establishing minimum requirement of regulatory capital or liquid reserved for finance based institutions. Capital requirements based on risk are there for the protection of financial business, their clients, their investors and the entire economy on the whole. All of the requirements are crucial for ensuring that all financial institutions have sufficient capital for sustaining operational losses (Yamani and Swanson, 2014). This is done with the maintenance of efficient and safe market platform. This helps in reducing the adverse effect on the scheme of a specific risk, while limiting the overall reduction of risks due to diversification. There is a need for making the right decisions by the right individuals maintaining timeliness under requisite regulatory, oversight, review, reporting and control compliance arrangements. Hence, it becomes crucial for determining overconfidence across the investors and key factors that impact overconfidence.