Design Three Trading Strategies Based on Overconfidence, Loss Aversion, and Herd Behaviour

Abstract

<p>There is a basic assumption in the field of economics, which is people are rational. It might be taught in the first class of the principle of economics. However, this assumption could hardly be applied to the real world since people can be affected easily sometimes, especially when they cope with their assets. Thus, with combination of psychology and academic finance, behavioural finance aims to understand the effects influencing investors’ decision-making. This paper will discuss some effects which can be commonly seen in the real world, overconfidence, loss aversion, and herd behaviour included.</p>