Abstract
INTRODUCTION:Traditional models of finance assume that investors are totally They take their investment decision to maximize their expected utilities. Efficient Market Hypothesis, proposed by Eugene Fama (1970) suggests that all markets are fully efficient. In efficient markets investors demonstrate self-control on their They react on each and every piece of information and that to rationally. There is no role of emotions feelings and other behavioral factors. But this assumption no longer works as number of researchers have found evidence that emotional and behavioral factors also play an important role in investment decision making. And, that investors not al ways react as rational creature when comes to investment as feeling of loss, winner's pride, mental accounting, framing of investments, herding etc also effect decision making.Behavioral Finance is an emerging field which deals with irrational nature of investors. Efficient Market Hypotheses suggest that all market information are immediately incorporated in security prices and that security prices are best estimated and accurate prices all time. But Behavioral Finance denies this assumption and suggest that there are number of evidence such as January Effect, Weekend effect, Seasonality etc. through which it has proved that markets are not efficient all time and investors often travel from rationality to irrationality in perhaps a predictable manner. To some extent, our emotions, feelings and perceptions influence investment decisions and these are known as mental biases. Behavior finance makes an attempt to study irrational behavior of investors in market based on said mental bias. It also explains factors responsible for such behavior. The established finance seeks to understand stock markets using models in which investors are rational. Rationality for that purpose means when investors receive new information, they update their viewpoint on any financial action efficiently. This traditional framework is theoretically simple, but Shiller (2000) advocates that stock market are strongly governed by market information, which directly influence investment behavior of investor. It can be concluded that individual trading behavior cannot be understood in established traditional finance structure. Clark (1918) rightly mentioned that economist may attempt to ignore psychology, but it is sheer impossibility for him to ignore human nature. Emergence of concept of Behavioral finance in 1980s was response to anomalies detected in standard finance models which are blamed for lack of realism in assumptions on human behavior. It examines financial phenomenon of investment through dual lenses of finance and of psychology. In behavioral finance, all stock market anomalies are explained by psychological theories. Lintner (1998) defines behavioral finance as being the study of how humans interpret and act on information to make informed investment decisions. Olsen (1996) asserts that this field of psychological finance tries to understand complexity of standard finance through of psychological decision making process of market. It may be argued here that some stock market phenomenon can be better understood using such models in which some investors are not fully Behavioral finance is expected to look into following possible behavioral patterns in financial markets:* Reaction of an investor to a price change* Reaction of an investor to a news* Extrapolation of past trends into future* Focus on some popular stocks and lack of attention to fundamentals* Seasonal price cycles etc.On theoretical level, if exploitable pricing anomalies exist in market, credibility of Efficient Market Hypothesis (proposed by Fama, 1970) is diluted. When new information is quickly reflected into price, market is known to be efficient. …
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