...Cognitive Behavioral Psychology is everything that makes us who we are. It is how we think which contracts with our emotions and then affects our behavior. It helps us view the world in different ways and how we react with other people. It affects our thinking and our “mental presentation” of the world. In the movie Inside Out, Riley loses happiness and sadness affecting her behavior to the world and her interactions with people. This affects her relationship with her parents, her love for hockey, and her relationship with her friends. Her situations can be described with the abc theory. The abc theory is made out of three parts: The activating event, the belief, and the consequence. The activating event starts when Riley’s joy and sadness...
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...Humanistic and Cognitive Behavioral Applications of Psychology with A Shout Out to Buddhist Psychology | |My perspective of History and Systems in Psychology | | | Psychology as a scientific discipline can be divided into four major historical forces. The first historical force being psychoanalysis, the second force behaviorism, the third force humanistic, and the fourth force multicultural. Each historical force represents the zeitgeist or prevailing school of thought for its historical time, and each school of thought brought about the development of different theoretical applications and ideological approaches. This paper will focus on theorists and theoretical applications of the second and third historical forces. Behaviorism is the school of thought founded by John B. Watson and is the second historical force in psychology. The basis of behavioral psychology suggests that all behaviors are learned and therefore can be unlearned and changed. Watson, like most other behaviorists were of the mindset that only observable, or overt behaviors, should be studied because concepts such as emotion and cognition were too subjective (Cherry, K. 2011). Cognitive applications of behavioral psychology known as Cognitive Behavioral psychology or Cognitive Behavioral Therapy (CBT) differs...
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...I’m Chief Operating Officer for a venture fund. Working with new businesses (startups) for years, I’ve noticed an odd thing. When I see startup teams for the first time, their eyes are shining, their enthusiasm is sparkling, and they show enormous productivity. And…they’re desperate for money, of course. They ground their financial needs and we see that without investments they can’t move further. Investors believe in their idea and business model, and everybody admires their inspiration. What happens when money are already given to those startups? We observe dramatic decrease in efforts and productivity. Deadlines set before are not met. Product’s time to market exceeds all the deadlines. Enthusiasm is gradually being replaced by procrastination and everything ends up to demanding more money from investors. Why this problem is so painful? There are millions of startups arising every year worldwide. Thousands of them are supported by investors. Major part (over 90%) fails but in many cases reasons of failure lie not in market field. It’s not about inferior product or bad business model. Change in team’s behavior after raising funds effects productivity and flexibility and sometimes leads to failure. Funds and angels rarely believe in financial assessments and project deadlines now, finding other ways to secure their investments. This problem is already covered with our course up to date, for example in the part when Dan describes loss aversion effect. Unlike the TV sellers...
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...From a very early age my child, Elise, had developed rather poor sleeping behaviors. At around zero months Elise was only sleeping two hours a time. A typical sleep cycle for newborns involves a four-hour cycle of the baby being awake for one hour at a time and then sleeping for approximately three consecutive hours (Kail,p.93). At around three months, Elise was very active and seemingly in constant motion and awake more often than is typical for other babies. It is normal for babies around three or four months of age to be sleeping through the night (Kail, p.93). At around eight months Elise was still experiencing issues with sleep. Although I could tell she was tired, she would cry when I try to put her to bed. Although Elise experienced problems with sleeping in the first nine months, her motor skills developed at a normal and slightly advanced rate. At eight months Elise was a very active crawler. When looking at locomotion and crawling specifically, crawling usually begins around seven to eight months, placing Elise in the normal range for gross motor skills (Kail p.148). At nine months Elise had continued to grow in her gross motor skills. Elise had developed the ability to pull herself up to stand and was continuing to enjoy crawling. Infants are usually able to pull themselves up to stand by using furniture at eight months and is an important milestone in motor development (Kail, p.148). WALKING By nine months Elise had also developed in her fine motor skills, reaching...
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...Chapter 18 A SURVEY OF BEHAVIORAL FINANCE ° NICHOLAS BARBERIS University of Chicago RICHARD THALER University of Chicago Contents Abstract Keywords 1. Introduction 2. Limits to arbitrage 2.1. Market efficiency 2.2. Theory 2.3. Evidence 2.3.1. Twin shares 2.3.2. Index inclusions 2.3.3. Internet carve-outs 3. Psychology 3.1. Beliefs 3.2. Preferences 3.2.1. Prospect theory 3.2.2. Ambiguity aversion 4. Application: The aggregate stock market 4.1. The equity premium puzzle 4.1.1. Prospect theory 4.1.2. Ambiguity aversion 4.2. The volatility puzzle 4.2.1. Beliefs 4.2.2. Preferences 5. Application: The cross-section of average returns 5.1. Belief-based models 1054 1054 1055 1056 1056 1058 1061 1061 1063 1064 1065 1065 1069 1069 1074 1075 1078 1079 1082 1083 1084 1086 1087 1092 ° We are very grateful to Markus Brunnermeier, George Constantinides, Kent Daniel, Milt Harris, Ming Huang, Owen Lamont, Jay Ritter, Andrei Shleifer, Jeremy Stein and Tuomo Vuolteenaho for extensive comments. Handbook of the Economics of Finance, Edited by G.M. Constantinides, M. Harris and R. Stulz © 2003 Elsevier Science B.V All rights reserved . 1054 5.2. Belief-based models with institutional frictions 5.3. Preferences N. Barberis and R. Thaler 6. Application: Closed-end funds and comovement 6.1. Closed-end funds 6.2. Comovement 7. Application: Investor behavior 7.1. 7.2. 7.3. 7.4. 7.5. Insufficient diversification Naive diversification Excessive trading The selling decision...
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...From Efficient Markets Theory to Behavioral Finance 1. What does Shiller mean by Behavioral Finance? Behavioral Finance is the collaboration between finance and other social sciences. This field of research is focused on determining the precise degree to which various market forces—including rational analysis of company-specific and macroeconomic fundamentals; human and social psychology; and cultural trends—influence investors’ expectations and determine their level of confidence or fear. Behaviorists believe that at times, the real determinants of stock market movements are the forces of human and cultural psychology, oranimal spirits (a term coined by economist John Maynar 2. How does Behavioral Finance contrast with Efficient Market Theory? Behavioral finance takes issue with two crucial implications of the EMH: (1) that the majority of investors make rational decisions based on available information; and (2) that the market price is always right. Behaviorists believe that numerous factors—irrational as well as rational—drive investor behavior. In sharp contrast to efficient markets theorists, behaviorists believe that investors frequently make irrational decisions and that the market price is not always a fair estimate of the underlying fundamental value. Still, many proponents of behavioral finance agree with at least one implication of the efficient market theory—that it’s not possible to reliably earn abnormal returns. 3. What prediction does Efficient...
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...Behavioural Finance Martin Sewell University of Cambridge February 2007 (revised April 2010) Abstract An introduction to behavioural finance, including a review of the major works and a summary of important heuristics. 1 Introduction Behavioural finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets. Behavioural finance is of interest because it helps explain why and how markets might be inefficient. For more information on behavioural finance, see Sewell (2001). 2 History Back in 1896, Gustave le Bon wrote The Crowd: A Study of the Popular Mind, one of the greatest and most influential books of social psychology ever written (le Bon 1896). Selden (1912) wrote Psychology of the Stock Market. He based the book ‘upon the belief that the movements of prices on the exchanges are dependent to a very considerable degree on the mental attitude of the investing and trading public’. In 1956 the US psychologist Leon Festinger introduced a new concept in social psychology: the theory of cognitive dissonance (Festinger, Riecken and Schachter 1956). When two simultaneously held cognitions are inconsistent, this will produce a state of cognitive dissonance. Because the experience of dissonance is unpleasant, the person will strive to reduce it by changing their beliefs. Pratt (1964) considers utility functions, risk aversion and also risks considered as a proportion of total assets. Tversky and Kahneman...
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...Behavioural Finance Martin Sewell University of Cambridge February 2007 (revised April 2010) Abstract An introduction to behavioural finance, including a review of the major works and a summary of important heuristics. 1 Introduction Behavioural finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets. Behavioural finance is of interest because it helps explain why and how markets might be inefficient. For more information on behavioural finance, see Sewell (2001). 2 History Back in 1896, Gustave le Bon wrote The Crowd: A Study of the Popular Mind, one of the greatest and most influential books of social psychology ever written (le Bon 1896). Selden (1912) wrote Psychology of the Stock Market. He based the book ‘upon the belief that the movements of prices on the exchanges are dependent to a very considerable degree on the mental attitude of the investing and trading public’. In 1956 the US psychologist Leon Festinger introduced a new concept in social psychology: the theory of cognitive dissonance (Festinger, Riecken and Schachter 1956). When two simultaneously held cognitions are inconsistent, this will produce a state of cognitive dissonance. Because the experience of dissonance is unpleasant, the person will strive to reduce it by changing their beliefs. Pratt (1964) considers utility functions, risk aversion and also risks considered as a proportion of total assets...
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...A Critical Analysis of: Investor Irrationality and Self-Defeating Behavior FIN645 Introduction For many years, finance traditionalists have held on to the theory that markets are efficient and that prices correctly reflect the information available to the market as a whole. This has come to be known as the efficient market hypothesis which was originally postulated by Eugene Fama in 1965. After a thorough statistical study of the movements of investment prices Fama concluded that “such movements were essentially random and unpredictable” (Shefrin p.75). Fama pointed out that “in an efficient market, prices correspond to intrinsic (or fundamental) value” (Shefrin p.75). In short, what the theory concludes is that it is impossible to beat the market; that no investor can ever purchase undervalued stocks or sell stocks at inflated prices. The market will always correct itself by incorporating all relevant information into the price of a security thus eliminating an individual investor’s ability to outperform. EMH has grown to become a cornerstone of financial theory and is still applied by many traditionalists when attempting to explain the behavior of financial markets. While there is much evidence in support of this theory there is an equal amount dissention. There are many who argue that there is ample evidence available that counters the central ideas of EMH and demonstrate its shortcomings such as: individuals who have shown that they can consistently...
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...Behavioural Finance Literature Review Name Institution Professor Date ABSTRACT INTRODUCTION It is tough today to avoid the concept of behavioural finance in the day to day operations of the modern day’s business. All over the world Governments are in a process of experimenting the application of the psychology of decision making to tune their citizens towards better behaviours. Companies and institutions are paying attention to this concept as a new opportunity of realizing profits. Traditionally, the finance paradigms relied heavily on understanding finance markets using the models that had agents who were rational. In the Scenario, rationality implied that when the companies received new information, they updated their agents believes as described by the Bayes law. Besides, with their beliefs, managers and agents made decisions that are acceptable because they are consistent with the Savage idea of Subjective Expected Utility. This traditional approach was viewed as successful if it received data backing. However, as markets became complicated, it became clear that basic acts involving the stock market, the average returns and peoples trading behaviours could not be comprehended in the traditional model. The behavioural finance is the new approach to the emerging financial markets as it addressed the challenges faced by the traditional paradigms. The basic argument of this paradigm is that some financial phenomena can be best can be best comprehended by the...
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...2012 Course title: Financial Theory and Research (Part 1 – Financial Markets and Asset Pricing) Team Member: Haotian Lin; Nan Bai; Wenyi Gu; Yibo Zang Summary Standard finance (modern portfolio theory), compared with Behavioral finance, is no longer modern: dating back to the late 1950s modern portfolio theory was developed (Statman 2008) Behavioral finance offers alternative explanation for investors and markets. Behavioral finance, which has been a controversial subject and is becoming more widely accepted, is finance from a broader social science perspective including psychology and sociology (Shiller 2003). Behavioral finance helps identify the financial market’s inefficient reaction to public information, which cannot be explained by traditional financial models with assumptions such as expected utility maximization, rational investors, and efficient markets (Ritter 2003; Statman 2008). Statman (2008) compares “normal” investors and rational investors by pointing out the difference that normal investors are reluctant to realize losses since normal investors are affected by cognitive biases and emotions. Statman also compares Behavioral Portfolio Theory and Markowitz mean-variance theory. Another comparison made by Statman is between Behavioral Asset Pricing Model (BAPM) and capital asset pricing model (CAPM), stating that the asset pricing model of standard finance is moving away from CAPM toward Fama and French three-factor model, a model similar to the BAPM. Bloomfield’s...
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...Efficient Market Discussion and Understanding of Finance As the 2013 Nobel Laureates in economic science, both of Eugene Fama, from the University of Chicago and Robert Shiller, from Yale University, have made famous contribution to the finance world. Even though their views toward market efficiency seem mutually contradictory, their theories has been highly valued by the finance academia as well as industry. This paper compares and contrasts the work of both of them and discusses how their work influence my understanding of finance. Fama is known for his work in initiating and developing the “efficient market hypothesis (EMH).” In his paper, Fama defines “efficient market” as “a market in which prices always fully reflect available information” (Fama 1970). If prices did reflect all available information, trading rules and fundamental analysis would not help investors to constantly earn abnormal return. This proposition has been checked by others and himself in the following papers: "Random Walks in Stock Market Prices (Fama 1965)," and "Filter Rules and Stock Market Trading Profits" (Blume, Fama 1966). Stock prices react to new information so quickly that it is almost impossible to trade on that piece of new information and profit from it. Furthermore, investors cannot earn abnormal returns without taking more systematic risk. To address the different types of information that stock prices could reflect, Fama prosed three types of market efficiency: (1) strong-form, where...
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...THE JOURNAL OF FINANCE • VOL. LVI, NO. 4 • AUGUST 2001 Investor Psychology and Asset Pricing DAVID HIRSHLEIFER* ABSTRACT The basic paradigm of asset pricing is in vibrant f lux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models. The best plan is . . . to profit by the folly of others. — Pliny the Elder, from John Bartlett, comp. Familiar Quotations, 9th ed. 1901. IN THE MUDDLED DAYS BEFORE THE RISE of modern finance, some otherwisereputable economists, such as Adam Smith, Irving Fisher, John Maynard Keynes, and Harry Markowitz, thought that individual psychology affects prices.1 What if the creators of asset-pricing theory had followed this thread? Picture a school of sociologists at the University of Chicago proposing the Deficient Markets Hypothesis: that prices inaccurately ref lect all available information. A brilliant Stanford psychologist, call him Bill Blunte, invents the Deranged Anticipation and Perception Model ~or DAPM!, in which proxies for market misvaluation are used to predict security returns. Imagine the euphoria when researchers discovered that these mispricing proxies...
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...BEHAVIORAL FIANCNE AND WEALTH MANAGEMENT AUTHOR : MICHAEL M. POMPiaN BEHAVIORAL FIANCNE AND WEALTH MANAGEMENT AUTHOR : MICHAEL M. POMPiaN BOOK REVIEW OF : BOOK REVIEW OF : PREPARED BY : ASHISH SHARMA PREPARED BY : ASHISH SHARMA 2014 2014 Behavioral Finance and Wealth Management Author Information “Michael M. Pompian, CFA, CFP, is a partner at Mercer Investment Consulting, a firm serving institutional and private wealth clients. Prior to joining Mercer, he was a wealth management advisor with Merrill Lynch and PNC Private Bank, and served on the investment staff of a family office. Pompian is a Chartered Financial Analyst (CFA), a Certified Financial Planner (CFP), and a Certified Trust Financial Advisor (CTFA). He is also a member of the CFA Institute (formerly AIMR) and the New York Society of Security Analysts (NYSSA). He holds a BS in management from the University of New Hampshire and an MBA in finance from Tulane University. Pompian is a regular speaker on the subject of behavioral finance and has published several articles on the subject. He is married with three sons and can be reached at michael.pompian@mercer.com. “ Michael M. Pompian describes various biases which we can see in human beings , also tells about various experiments on human beings in his book “ BEHAVIOURAL FINANCE AND WEALTH MANAGEMENT “ and tells “HOW TO BUILD OPTIMAL PORTFOLIOS THAT ACCOUNTS FOR INVESTOR BIASES “ The book is published...
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...Without Mr. Sandberg’s and Mr. Östebo’s contribution, this thesis would not have been possible to complete. To all the respondents: thank you for your participation! _____________ Hannes Bernéus ____________ Carl Sandberg Jönköping International Business School Date: 2008-12-11 i _____________ David Wahlbeck Bachelor Thesis within Business Administration Title: Authors: Tutor: Date: Subject terms: Behavioral Finance – Investors’ Rationality. Hannes Bernéus, Carl Sandberg, David Wahlbeck Urban Österlund 2008-12-02 Behavioral Finance, Behavioral Economics, Finance, Economic Psychology. Abstract Purpose: The purpose of this thesis is to examine if professional investors are indicating tendencies of irrational behavior when exposed to certain psychological dilemmas related to the financial world. Background: A new field within financial theory emerged in the 1980s; one which did not build on fundamental cornerstones but from the world of psychology, called Behavioral Finance. The theories within Behavioral Finance also offered a new perspective when explaining market movements. The market is determined by people who can not always be considered rational in their investment decisions, especially not during times of financial distress...
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