...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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...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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...Popular IPOs and Behavioural Finance 1 a) The IPO of Facebook Executive Summary This report examines and evaluates any observable behavioural finance phenomena during the recent Facebook Initial Public Offering. It starts by looking into Facebook’s background and what led up to the decision of turning the company public. It gives a brief explanation on the reasoning behind the decision and outlines the company’s main aims and focuses. It then gets into a few behavioural finance theories which help to explain the reasoning and decision-making process of investors purchasing Facebook stocks. Due to the very high anticipation of Facebook’s IPO and the company’s overall popularity, many investors may be over-confident or overestimate Facebook’s stock performance in the future. This may be damaging towards investors. However it is then concluded, that even though many investors decisions to purchase Facebook stocks may not be completely rational, they may still turn out to be beneficial for the investor. Introduction An IPO or Initial Public Offering, which can also be called Stock Market Launch, can be defined as a private company’s first sale of stock to the public. It is through this process that a private company is transformed into a public company. One of the most common reasons for going public is to raise expansion capital, which is to be used for the company’s growth. Behavioural Finance can be defined as a field of finance, which seeks to provide explanations as...
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...ABSTRACT Behavioural finance is part of finance that seeks to understand and explain the systematic financial market implications of psychological decision processes. It utilizes knowledge of cognitive psychology, social sciences and anthropology to explain irrational investor behavior that is not being captured by the traditional rational based models. INTRODUCTION Classical investment theories are based on the assumption that investors always act in a manner that maximizes their return. Yet a number of research show that investors are not always so rational. Human become puzzled when the uncertainty regarding investment decision engulfs them. People are not always rational and markets are not always efficient. Behavioral finance explains why individual do not always make the decisions they are expected to make and why markets do not reliably behave as they are expected to behave. Recent research shows that the average investors make decisions based on emotion, not logic; most investor’s buy high on speculations and sale low on panic mood. Psychological studies reveal that the pain of losing money from investment is really three times greater than the joy of earning money. Emotions such as fear and greed often play a pivotal role in investor’s decision; there are also other causes of irrational behavior. It is observed that stock price moves up and down on a daily basis without any change in fundamental of economies. It is also observed that people in the stock market...
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...SHRI RAM COLLEGE OF COMMERCE A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR Project work Paper No. – CH 6.3 (b) (Submitted for Partial Fulfillment Towards Requirement of B.COM (HONS.) Course) Ashvi Mittal 12BC136 12072204129 E-21 2014-15 UNDER THE SUPERVISION OF Miss Ankita Tomar Assistant Professor Department of Commerce Shri Ram College of Commerce University of Delhi 1 DECLARATION BY STUDENT This is to certify that the material embodied in this study entitled “A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR” is based on my own research work and my indebtedness to other work/publications has been acknowledged at the relevant places. This study has not been submitted elsewhere either wholly or in part for award of any degree. Ashvi Mittal B.Com(H) Section-E 12BC136 2 DECLARATION BY TEACHER INCHARGE This is to certify that the project titled “A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR” done by Ashvi Mittal is a part of her academic curriculum for the degree of B.Com(H). It has no commercial implication and is done only for academic purpose. Mrs Aruna Jha Miss Ankita Tomar (Teacher in- charge’s name and signature) signature) 3 (Mentor’s name and Signature) ACKNOWLEDGEMENT I feel great pleasure in expressing my gratitude to my mentor Miss Ankita Tomar of Commerce Department, Shri Ram College of...
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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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...Management, Vol. 14, No. 1, 2007, 12–29 doi: 10.1111/j.1468-036X.2007.00415.x Behavioural Finance: A Review and Synthesis Avanidhar Subrahmanyam Anderson Graduate School of Management, University of California at Los Angeles, USA E-mail: subra@anderson.ucla.edu Abstract I provide a synthesis of the Behavioural finance literature over the past two decades. I review the literature in three parts, namely, (i) empirical and theoretical analyses of patterns in the cross-section of average stock returns, (ii) studies on trading activity, and (iii) research in corporate finance. Behavioural finance is an exciting new field because it presents a number of normative implications for both individual investors and CEOs. The papers reviewed here allow us to learn more about these specific implications. Keywords: behavioural finance, market efficiency, cross-section of stock returns JEL classifications: G00, G10, G11, G14, G31, G32, G34 1. Introduction The field of finance, until recently, had the following central paradigms: (i) portfolio allocation based on expected return and risk (ii) risk-based asset pricing models such as the CAPM and other similar frameworks, (iii) the pricing of contingent claims, and (iv) the Miller-Modigliani theorem and its augmentation by the theory of agency. These economic ideas were all derived from investor rationality. While these approaches revolutionised the study of finance and brought rigour into the field, many lacunae were left outstanding by...
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...Chapter 16: Market efficiency: Concept of market efficiency An efficient market has been defined as one in which the prices of securities fully reflect all available information. This requires that the reaction of the market prices to new information should be instantaneous and unbiased. If such conditions exist, it will not be possible (except by chance) to employ either past information or a mechanical trading strategy to generate returns in excess of the returns warranted by the level of risk involved. In short, consistent excess profits will not be made. Or in an efficient market it is not possible to consistently make an abnormal return. Statement 1 What would cause a market to be efficient? The main argument in support of efficiency is the existence of a competitive market in which numerous investors are competing in an effort to make abnormal returns. It is suggested that, in such a market, investors will seek information and take immediate action to buy or sell securities based on any new information. As a result, information will be impounded very quickly in market prices. Market efficiency may be improved by an increase in the quantity and quality of information that is made publicly available, and a reduction in restrictions on insider trading. Statement 1 * New information regarding securities comes to the market in random fashion. * Profit maximising investors cause security prices to adjust rapidly to reflect the effect of new information. ...
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...[pic] Ecole Supérieure Libre des Sciences Commerciales Appliquées Review of Literature Behavioral Finance Presented to Dr. Mohamed EL-Hennawy Group Assignment Prepared By Albert Naguib Noha Samir Wael Shams EL-Din Moshira Gamil Marie Zarif January 2012 | TABLE OF CONTENTS | | | |List of Table………………………………………………………………………….. | |List of Figure ………………………………………………………………………… | |List of Abbreviations/Acronyms ……………………………………………………. | |Introduction……………………………………………………………………….. | |2. Appearance of Behavioral Finance…………………………………………………… | |2.1. Important Contributors…………………………………………………. ………. | |3. Behavioral Biases…………………………………………………………………… ...
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... |PART I | | | | | | |I |BASIC |4 - 7 | |II |STOCKS |8 - 11 | |IIII |INVESTORS |12 - 14 | |IV |INVESTING |15 - 21 | | | |...
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...Introduction Efficient market hypothesis is widely accepted by academic community as a cornerstone of modern financial theory. Fama (1970) gives detailed definition of this theory and states that efficient market is a market that stock prices quickly and fully reflect all available and newly released information, where majority of participants are rational in their decision making process and where an investor is not able to outperform the market through any analyses, because of actual price of stock shows its intrinsic value. Naturally such revolutionary hypothesis did not occur suddenly. In 1990 Louis Bachelier in his "Theory of Speculation" paragraph gave definition of informational efficiency of the market. This study was not being developed until 1953 when Maurice Kendall who postulated that stock prices movement follow the random walk theory. Further enhancement of these studies associated with the name of Eugene Fama who gave comprehensive resume of efficient market hypothesis, as well as empirical evidences to support it and defined three form of efficient market: weak, semi-strong and strong in 1970 (Dimson and Mussavian, 1998). Later several different researches have been carried out by financial academics which continuously underpinned efficient market hypothesis. Consequently this theory began widely use by investors for investment decision making process. However only after two decades this hypothesis began less dominance in the market. Several crashes, changing...
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...Q: 3: I have argued that investors take on greater risks because they have more money to invest and they already have low risk investments like government bonds, prime commercial property and blue chip shares. Does the FCIC report provide any evidence that this view is correct? History emerged with continuous record breaking issues. In the arena of finance and economics, this turns into a collapsing shape. Shaky sentiment though was felt when this kind of financial turbulence starts. But, it becomes too late which can be called as “little time to control it”. Arguments behind this kind of financial melting create lots of debate amid analysts, regulators, business personnel and so as general people. But, almost all the time, after effect left a digester for the future. This disaster begins with ‘Fear’ and turns into ‘Panic’. Then dilemma prevailed alongside the indecisions especially, to them who fall in trap. Massive losses incur always. Most of the time, it takes lots of interval to recover. Financial Crisis 2008 was a remarkable history that would shake all the people mostly in USA and Europe. Besides, nearly all the countries felt its bad paws that drastically affected the economy of respective countries. Beginning in 1990, getting incremental shape in 2000 and turning into a robust figure with the participation of general people, housing bubble left an antiquity of learning for all the citizens. Excess liquidity of one country that remained unused passes to another country...
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...are rational. Rational agents is agents which has a clear preferences, models uncertainty via expected values, and always chooses to perform the action that results in the optimal outcome from all the feasible actions. Their actions depend on their preferences, their information of the current situation; which may come from past experiences, the actions, duties and obligations available and the estimated or actual benefits that the agents can get after the actions. In reality, however, agents are not always rational; people’s decision does not always correspond to the concept of economic rationality. Most people, in fact, make their decision rather intuitively. This leads to an interesting new study of behavioural finance, a study that linked psychology with finance. It provides explanations to well-known market anomalies such as: the small firms outperform; in which the case...
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...FINC3017 Investments and Portfolio Management Essay: Market Efficiency and Anomalies Topic：Stock price momentum: Jegadeesh and Titman (1993) Momentum anomaly and EMH Anomaly is a stock return deviation that challenge efficient market hypothesis (EMH). Jegadeesh and Titman (1993) theorise price momentum anomaly in the stock market for the first time. It contradicted to efficient market hypothesis thereby is widely debated. EMH states that no consistent excess return can be achieved since security prices fully reflect all available information (Fama 1970). Therefore, future prices cannot be predicted through technical analysis of past prices. If the hypothesis is true, passive investment strategy ought to be taken, because it is impossible to get abnormal return by aggressive trading. However, Jegadeesh and Titman show that stocks performed well over the previous 3 to 12 months tend to continue to perform well over 3 to 12 months holding periods. Buy past winners and short past losers earned statistically significant positive return of averaging 12.01% per year. Predictable price patterns and excess returns contradict the efficient market hypothesis. Investors and fund managers perform actively in pursuing abnormal profits. Literature review and the reason of anomaly A large number of literatures illustrate that momentum anomaly exist. Some important literatures are Chan, Jegadeesh and Lakonishok (1996), Conrad and Kaul (1998) and Moskowitz and Grinblatt (1999). Lee and Swaminathan...
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...FINC3017 Investments and Portfolio Management Essay: Market Efficiency and Anomalies Topic：Stock price momentum: Jegadeesh and Titman (1993) Momentum anomaly and EMH Anomaly is a stock return deviation that challenge efficient market hypothesis (EMH). Jegadeesh and Titman (1993) theorise price momentum anomaly in the stock market for the first time. It contradicted to efficient market hypothesis thereby is widely debated. EMH states that no consistent excess return can be achieved since security prices fully reflect all available information (Fama 1970). Therefore, future prices cannot be predicted through technical analysis of past prices. If the hypothesis is true, passive investment strategy ought to be taken, because it is impossible to get abnormal return by aggressive trading. However, Jegadeesh and Titman show that stocks performed well over the previous 3 to 12 months tend to continue to perform well over 3 to 12 months holding periods. Buy past winners and short past losers earned statistically significant positive return of averaging 12.01% per year. Predictable price patterns and excess returns contradict the efficient market hypothesis. Investors and fund managers perform actively in pursuing abnormal profits. Literature review and the reason of anomaly A large number of literatures illustrate that momentum anomaly exist. Some important literatures are Chan, Jegadeesh and Lakonishok (1996), Conrad and Kaul (1998) and Moskowitz and Grinblatt (1999)....
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