Behavioral Finance Concepts Research Articles

A Brief Mapping of Theory and Evidence of Investors' Behavioural Biases

Investment decision making focuses on how investors make decisions to buy or sell securities. What guides their choices among alternatives, what are their investment objectives, constraints, and risk profile; and ultimately, what influences their decision making during the stock selection process. Behavioural finance deals with the psychology of the investor. It tries to explain how an investor makes an investment decision and how behavioural and other factors influence the decision making of an investor. Behavioural factors primarily include behavioural biases and personal characteristics of an investor, that is, personality, attitude, risk tolerance, and demographic factors, while other factors include external contextual factors like accounting information, market situations, brand image, and so forth, which have a bearing on decision making. The present paper provides an in-depth review of literature of prominent studies in the area of behavioural finance. The first part of the paper explains the concept of behavioral finance, the second part gives a detailed discussion on the classification of behavioural biases, and the third part discusses the effect of behavioural biases on the trading behaviour of the investors and the feelings of investors after experiencing the outcomes of investment. Towards the end, a comprehensive framework has been formulated representing the influence of behavioural biases on investment behaviour of an investor. The paper concludes that behavioural biases play a significant role in the decision making of the investors, and these biases not only shape the current investment decisions, but also influence investors' future decision making.

Financial Crisis During 2007 And 2008: Efficient Markets Or Human Behavior?

The recent U.S. financial crisis, the U.S. stock market crash of 1987, and other recent anomalies have seriously challenged Famas classic efficient capital markets hypothesis. These events have made it likely that future capital markets research will be enriched by the important role that human behavior plays in the success or failure of the financial markets. This paper examines the factors causing the recent crisis within the United States financial services sector, the degree to which it may be explained by efficient capital markets theory and the degree to which such behavioral finance concepts as noise, excessive volatility, fashion and fads, and irrational behavior compromise that theory.

English

Behavioral finance is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets. In this paper, concepts of behavioral finance are surveyed and then the portfolio selection model in framework of behavioral finance theories is presented and compared with the Mean-Variance rational pattern. Historical data of TEDPIX for 10 years has been used and separated to 2 parts of test and evaluation groups. The optimum weight for risky asset proposed by standard mean-variance and behavioral model based on returns for the first 7 years (test data) in the 3 months periods. After that, returns of 84 optimum portfolios in a three year evaluation period are calculated. Mean test (CL=95%) shows that in Tehran Stock Exchange, the research hypothesis return of behavioral model is greater than return of standard mean-variance model, was rejected.   Key words: Behavioral finance, investment portfolio, mental accounting, asymmetric risk preference, loss aversion.

Analýza vlivu počasí na obchodování na akciových trzích

Práce se zabývá analýzou vlivu počasí na obchodování na českém a americkém akciovém trhu. Vychází přitom z konceptu behaviorálních financí, které analyzují vliv psychologie na investorské rozhodování. Pomocí binárního rozdělení je zkoumán především vliv výskytu atmosférických jevů v podobě sněžení, deště a mlhy na výnosnost trhu jako celku. Výsledky výzkumu prokazují vliv těchto jevů na výnosnost pouze v minoritním počtu případů. Zkoumán byl také vliv podzimního období na psychologii investorů a tedy na výnosnost. Analýza nevyvrátila tuto posloupnost pouze v případě českého akciového trhu. Výskyt sledovaných atmosférických vlivů rovněž nedokázal vysvětlit lednový a pondělní efekt.

Finanças comportamentais: uma introdução

A subject often debated in Finance is the validity of assumptions regarding traditional theories, especially in relation to the rationality of economic agents. Studies endeavoring to improve theoretical models have incorporated behavioral aspects previously disregarded thereby creating the new and promising field of behavioral finance. The remarkable growth of this unorthodox approach has been spurred by attempts to explain phenomena in the financial markets which are incompatible with traditional model forecasts. A brief introduction to the concepts of behavioral finance was presented with comments on pioneer applications that incorporated two frequent examples of cognitive biases, namely optimism and excessive confidence, for the purpose of building a new theoretical paradigm.

A Behavioral Explanation for the Negative Asymmetric Return-Volatility Relation

We examine the short-term dynamic relation between the S&P 500 (Nasdaq 100) index return and changes in implied volatility at both the daily and intraday level. Neither the leverage hypothesis nor the volatility feedback hypothesis adequately explains the results. Alternatively, we propose that the behavior of traders (from the representativeness, affect, and extrapolation bias concepts of behavioral finance) is consistent with our empirical results of a strong daily and intraday negative return–implied volatility relation. Moreover, both the presence and magnitude of the negative relation and the asymmetry between return and implied volatility are most closely associated with extreme changes in the index returns. We also show that the strength of the relation is consistent with the implied volatility skew.

The Interplay between Strategy and Finance

The theory of finance and the theory of strategic planning can be viewed as two cultures that investigate the same problem, despite the differences in language and approach that make them apparently incompatible. In this theoretical essay, it is suggested a new perspective for studies in strategy: the Assets-Actions Approach (AAA). This approach improves the resource-based view and dynamic capabilities view by (i) including resources and capabilities in the concept of assets and (ii) incorporating aspects of actions as relevant factors in the establishment of competitive advantages. The study shows that concepts of behavioral finance may be useful, but not necessarily sufficient to accommodate the complexity of corporate strategies. Thus, the AAA leaves out of consideration elements that are not properly set by traditional financial models. The implications of AAA unfold to: (i) from a theoretical point of view, the simplification of constructs and the suggestion that the discount rate or cost of opportunity is not homogeneous, being dependent on the assets of the company and (ii) from an empirical point of view, the need for formulation of new constructs to measure actions as well as perceived value for stakeholders.

A behavioral explanation for the negative asymmetric return–volatility relation

We examine the short-term dynamic relation between the S&P 500 (Nasdaq 100) index return and changes in implied volatility at both the daily and intraday level. Neither the leverage hypothesis nor the volatility feedback hypothesis adequately explains the results. Alternatively, we propose that the behavior of traders (from the representativeness, affect, and extrapolation bias concepts of behavioral finance) is consistent with our empirical results of a strong daily and intraday negative return–implied volatility relation. Moreover, both the presence and magnitude of the negative relation and the asymmetry between return and implied volatility are most closely associated with extreme changes in the index returns. We also show that the strength of the relation is consistent with the implied volatility skew.

A Behavioral Perspective for Cognitive Biases between Financial Experts and Investors: Empirical Evidences of Taiwan Market

This empirical study tests the hypothesis of whether the good stocks are the so-called good corporations or not. Based upon the concepts of behavioral finance, the capital markets are highly complex and uncertain. Suppose the investors focus on the fixed rules and intuitions to make decisions, cognitive biases exist. Since financial experts have lower cognitive biases than investors because of their financial and professional capabilities, the good stocks they selected should perform better in capital markets. Actually, they do not, which indicating the criteria to select good corporations and good stocks are different. JEL classification: G11; G12; G14 Keywords: Behavioral finance, Benchmark enterprises, Cognitive biases, Efficient market, Quality of management

A Risk Perception Primer: A Narrative Research Review of the Risk Perception Literature in Behavioral Accounting and Behavioral Finance

A significant topic within the behavioral finance literature is the notion of perceived risk pertaining to novice investors (i.e. individuals, finance students) and investment professionals (i.e. financial planners, security analysts). The author provides an overview of the concepts of risk, perception, and risk perception with the financial scholar in mind. There is also a presentation on the behavioral finance concepts and themes that might influence an individual's perception of risk for different types of financial services and investment products. The next section presents a discussion of the significant risk perception research in the social sciences namely from psychology. This research work from psychology (i.e., risk perception studies in risky situations and hazardous activities) is the behavioral foundation for a substantial amount of the current contributions within the behavioral accounting and behavioral finance literature. In particular, the work of the Decision Research scholars including Paul Slovic and his co-authors on risk perception studies that have crossed over from psychology to the disciplines of behavioral accounting and behavioral finance (i.e. behavioral risk characteristics from psychology that are applied within a financial/investment decision making context). Within the last section of this paper, the author reveals the first of its kind thorough review of the academic research studies on perceived risk/risk perception from the disciplines of behavioral accounting since 1975 and behavioral finance since the late 1960s. This literature review incorporates 12 works from behavioral accounting and 71 endeavors from behavioral finance. In addition, the behavioral finance literature review section also includes approximately 10 narrative research reviews from risk perception studies in behavioral economics. A major facet of this paper was to bring together all the previous studies in the risk perception literature for the purpose of conducting a study based on the academic foundation of the main themes, research approaches, and findings from this collection of studies.