The rise of behavioralfinance over t he last t hree decades has been felt t hroughout finance and econom ics. M any scholars are now ready t o ent ert ain t he consequences of eit her rat ional or irrat ional aspect s of human judgment , as relevant for t he part icular applicat ion at hand. This readiness is great est for errors by individual m arket part icipant s; vigorous debat e cont inues about how psychological bias af fect s price det erminat ion in large and liquid market s. Nevert heless, a modern underst anding of t he finance field requires grounding in psychological as w ell as rat ional approaches. Today many of t he leading t heories about such fundam ent al t opics as invest or behavior, t he cross-sect ion of ret urns, corporat e invest m ent , and money managem ent , derive f rom psychological fact ors.
According to various conventional financial theories human beings behave rationally while making financial decisions. However, various studies have brought out that there are situations wherein human behavior gets influenced by moods and emotions which make humans behave in an unpredictable or irrational manner affecting their decision making. Whether the demographic and psychographic characteristics of the individuals in any way influence the behavioral investment decision making remains an unexplored area. This research takes up an important demographic variable gender and attempts to investigate the extent to which the variable influences investment decision making. The objective of the study is to find out whether gender differentiation plays an important role in influencing investment decisions and up to what extent men and women investors are influenced by behavioral bias. The study has implications for the finance industry as it attempts to analyze how behavioral and psychological factors influence different investors based on their basic gender differentiation and would also help to customize the portfolio with regard to their investment preferences. Keywords: BehavioralFinance, Investment Decision Making, gender differentiation, risk appetite, anchoring bias.
All the above book and journal explain the application of theory in stock market, individual trader and corporate finance. After observing all this our research has applied behavioralfinance theory in to the stock market and explain how the stock market start from bubble and end to crash via behavioral fiancé theory by taking case study of techno bubble in late 2000 This was the only sector which was badly affacted by investors behaviour during that period, after this period there was ups and downs in market but the impact of that that ups and down was not major and doesnt affacted investor much.
However, by psychological insight, uncertainty comes not only from the external environment, but also from the inability to understand the situations that links to the knowledge and include perception, cognition and human error (Rahnama Roodposhti and Zandieh; 2012). George and Hwang (2004) argue that investors use the highest price over the last 52 weeks as an anchor (reference) to estimate the effect of news on stock prices. The assumption is based on a psychological perspective as behavioral tendencies increases in the status of information uncertainty. This behavior leads to a kind of reaction to the news, especially is stronger for stocks near the highest price in 52 weeks. Finally the news spread and slowly absorbed in the stock price and the phenomenon leads to behavioral bias, under reaction and eventually created the future price acceleration. Thus, according to George and Hwang, the anchoring will be the motive of the acceleration profit, which is more significant in the situation of uncertainty. The environment around us, every day becomes more complex and this complexity leads to confusion and uncertainty. Many researches have been done in this area, including Sanjay and Conway (2015) deals with the issue of profitability, prices, income and momentum strategy. In this paper, profitable strategies are classified into univariate and multivariate move. Momentum earnings found by using data for 493 companies that are part of the Bombay Stock Exchange BSE 500 index in India from January 2002 to June 2010. In short, the momentum strategy is profitable. Momentum earnings, is able to deduce price and income move. In addition, the information content of gradual earnings surprises is very small. The capital asset pricing model (CAPM), Fama and French models are successful models to explain it. The analysis indicates strong support for explaining the behavior patterns overreaction to both winners and losers therefore winners and losers do better behavior during the market moves. This study contributes to asset pricing and behavioralfinance literature, especially in emerging markets such as India.
This study focuses on examining the determinant of the BehavioralFinance. Low rate of information technology in the Gaza strip local government is dedicated (Sultan, 2011). This study, therefore, A sample survey by interviewing and administering a questionnaire to a sample of Palestinians’ investors’ behavior is a measure to operationalize and extend the TPB model. a sample size of 257 is deemed to be appropriate using a formula proposed by Scheaffer, Mendenhall III, Ott, and Gerow (2011). An online internet questionnaire is considered for the data collection. There are three sections in the survey questionnaire. The first section is designed to collect demographic information relating to the respondents such as their: age, gender, Qualification, Job Title, Years of Experience, and working Ministry. The second section collects data about the Investors Decision- making Behavior. The last section collects data about factors affecting Investors Decision-making Behavior In this section, the questions have been built to proceed logically with one question linking to the next.
DC plans offer an attractive way to save and invest money for retirement. These types of plans receive favorable tax treatment, tax-deductible contributions and tax-deferred accumulations, and employers often match at least part of employees’ contributions. A simple cost-benefit analysis would suggest that the decision to join a retirement savings plan — when one is offered — should be easy. Nonetheless enrollment in DC plans is far from commonplace. Given the substantial incentives offered and the observed participation rates, traditional economics cannot adequately account for this evidence. However, insights from psychology and behavioralfinance can help interpret the drivers of this behavior, including the:
Ascertaining an institution’s mission and goals – and helping an investment committee or board members navigate the complexities of reaching them – can prove a challenge in the best of circumstances. But the challenge potentially becomes even more formidable when group members’ Investment Mindset, Investment Approach and Investment Purpose differ from each other. When perspectives diverge, fiduciaries and their Global Institutional Consultant can look to behavioralfinance to negotiate a path forward – and productively leverage differences in group perspectives to make great decisions.
Relatively, the study of (Meir Statman, 1999)  emphasis on the fact that market efficiency arises from behavioralfinance, standard finance, in addition to the value of investment professionals. Remarkably, the study defines the concept market efficiency in two different ways. Firstly, it defines market efficiency as the ability of investors of dealing with the market systematically. The other defini- tion states that security prices are rational which reflects only applied features such as risk, not value-expressive characteristics and sentiment. Hence, beha- vioral finance demonstrates that value-expressive features affect equally investor choices and asset prices as well.
Regarding limited rationality, according to Halfeld and Torres (2001, p. 65), “the man of BehavioralFinance is not totally rational; he is simply a normal man”. In the same line of reasoning, psychology, particularly research on decision-making, such as the study carried out by Richard Thaler, Daniel Kahneman and Amos Tversky, became enormously important to new research in the fields of economics and finance. Thaler (1999) relates understanding the market to understanding people, and states that, in a not too distant future, the term “BehavioralFinance” will be redundant – after all, he asks, does any type of finance not include behavioral aspects?
The BehavioralFinance theory, as opposed to the classical finance theory suggested that people make decisions based on the potential value of gains and losses rather than the utility of the decision. This theory has its own propositions even on the behavior of investors in shares and tries to explain the influence of psychological biases in their decision making process related to individual stocks. Researches have been conducted to explain the influence of these biases on the behavior of investors all over the world with the presumption that cultural and sociological factors also influence stock buying decisions apart from psychological factors. Therefore, this paper establishes the key psychological and cognitive biases that have a major impact on the Indian aspect of the decision making process of investors in shares( Bangalore in particular) and all the biases that do not, considering all the factors mentioned above which have been tested in a larger retrospect ( in major continents)
In terms of purpose, present research is practical, and in terms of collecting data, this research utilized descriptive method and of a survey type. Also, from the perspective of time, a cross-sectional study is considered quantitative in terms of data type. The statistical population of this study consists of two groups: the first group, experts in the field of behavioralfinance (including prominent professors in the universities of the country and capital market activists), of which 30 were selected and participated in identifying the factors influencing the behavior of individual investors. The second group is the individual investors in the Tehran Stock Exchange who have at least once bought / sold shares during the year. Their number is unlimited and 384 people were randomly selected using Morgan's table. Two
Behavioralfinance literature describes a number of investor errors and biases that cause investor behavior to deviate from what we might think of as the rational ideal. (See Shefrin, 2002 for an overview.) Examples include overconfidence, loss aversion, anchoring, reliance on rules of thumb, extrapolation bias, and the list goes on. In this article I will first attempt to address which of these various errors and biases are most important for planners to consider. Then I will move on to make the distinction between those behavioral traits that are best addressed by educating clients versus those that may defy education and best be dealt with by adjusting investment recommendations.
theory” (Fromlet, 2001). Behavioralfinance attempts to identify the behavioral biases commonly exhibited by investors and also provides strategies to overcome them. Behavioralfinance has two building blocks: cognitive psychology and the limits to arbitrage. Cognitive refers to how people think. Though the literature is very large, a brief review has been presented. A few studies have been carried out to examine the investment preferences and practices of the individual investors. Lewellen (1977) found that age, sex, income and education affect investors'
Behavioralfinance, defined as the combination of behavioral and cognitive psychology theory with economics and finance to explain financial decisions, has grown in popularity over the last several years. Behavioralfinance has also expanded into sports as researchers seek to find and explain anomalies that exist in the stock market. Existing research about sports is mixed, but prior studies have found that FIFA World Cup soccer matches have a statistically significant correlation with stock prices. This study further examines underlying factors that could influence this correlation. Specifically, it introduces an expectations framework and differentiates game outcomes based on whether the team exceeds, meets, or fails to meet expectations. Using regression analysis, the study finds some evidence for this relationship and that failing to meet expectations is correlated with a stock market decline during the World Cup.
individual investors. After several years behavioralfinance study, Li Xin Dan (2005) proposed a research framework that conducted behavioralfinance research into three levels: the research of individual investor' behavior; the research of group investors' behavior and the research of limited arbitrage and non-effective market. Rao Yulei proposed a framework behavioralfinance research about investors' cognitive biases and institutional investors' predict ability of market volatility. For example, institutional investors concentrated their portfolio based on the risk- adjusted returns (Choi, N. Fedenia, M. Skiba, H. & Sololyk, T., 2017). After testing whether the institutional investors are rational, as inspecting if institutional investors are heuristic or not. The empirical studies showed that the presence of anchoring and cognitive biases of institutional investors. Rao Yulei proved that there did not exist correlation between institutional investors sentiment and future investment returns, while the Chinese institutional investors could not predict the market effectively. Hersh Shefrin (2011) said that behavioralfinance was very important of understanding of the operation terms of Chinese financial market. Chinese investor behavior represented an obvious phenomenon. Thus, it seemed that Chinese investors and Western investors had similar characters. For example, both Chinese investors and Western investors demonstrated a strong disposition effect, none of them was reluctant to sell the current stock price when the price was lower than the purchase price. But in some ways, Chinese investors and Western investors had different characters. For example, Asian investors seemed to be more over-confident than Western investors. And the behavior between genders were different not only between the Chinese investors but also between the Western investors. In the West, the man seemed to trade more frequently than women, but in China, the trading patterns of men and women were similar, women has a significant proportion of 50%.
This article provides a brief introduction to behavioralfinance. Behavioralfinance encompasses research that drops the traditional assumptions of expected utility maximization with rational investors in efficient markets. The two building blocks of behavioralfinance are cognitive psychology (how people think) and the limits to arbitrage (when markets will be inefficient). The growth of behavioralfinance research has been fueled by the inability of the traditional framework to explain many empirical patterns, including stock market bubbles in Japan, Taiwan, and the U.S.
The Wall Street Journal (2009) found that where behavioralfinance comes in. Most investors are intelligent people, neither irrational nor insane. But behavioralfinance tells us we are also normal, with brains that are often full and emotions that are often overflowing. And that means we are normal smart at times, and normal stupid at others.
Framing effect is another imporatnt aspect of prospect theory. Framing effect means that indviduals‟ decsions usually rely on the way the problem is framed and proposed (Shfrin 2007). For example, proposing an investment with a 79% chance of success seems more attractive than proposing an investment with a 21% chance of failure even though both are the same investment. In behavioralfinance, the way the investment is being proposed can influence the decsion-making of an individual investor. At the personal level, an individual may make an irrational stock-buying decsion due to postive framing of a company via the media while, at the price level, the strong buying of the stock by individuals who are affected by the postive framing will push the stock price away from its fair value. Eventually, stock market efficiency will be reduced at the market level. Heuristics and prospect theory describe how investors actually make decisions in real-life situations. However, decisions have different dimensions. It is important to know these dimensions and know which of these dimensions should be given more attention.
Behavioralfinance can be defined as the application of psychology to explain market anomalies. The focus on interpersonal behavior and the role of social forces in governing behavior is known as social psychology. Statman (1999) stated that ―people are rational in standar [neoclassical] finance; they are normal in behavioralfinance‖. In many respects the assumptions underlying behavioralfinance models are similar to those used to construct traditional models, but the following differences are observed: (i) investors do not simply look at mean-variance congurations to make investment decisions as they may be influenced by other non-statistical characteristics such as taste, preference and other psycho- logical factors; (ii) investors may perceive trends even though no obvious pattern is present; (iii) imperfect information exists in the presence of trader heterogeneity; (iv) different investors tend to have different investment opportunities, depending on taste, while herding behavior may result in a common taste; and (v) the market is not necessarily in equilibrium, and while arbitrage opportunities exist they may be subject to market sentiment.