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Behavioral finance

2021-11-29 来源: 51Due教员组 类别: Essay范文

In many areas of finance, to model decision-making dilemmas based on psychological findings and to use less the assumption of complete rationality are the current trend.  Indeed, this type of research has gradually become a sub-discipline in finance, known as behavioral finance (Hens and Rieger, 2014). Behavioural finance, as a developing branch of  finance study, attempts to explain how decision makers take financial decisions in real life, and why their decisions might not appear to be rational every time and, hence, have unpredictable consequences. Behavioural finance has identified a number of factors that may take individuals away from a process of making decisions to maximise economic utility on the basis of rational analysis given all the required information (ACCA, 2018). According to Smithet et al (2016), the reason why people act against the rational thinking of  maximize their personal wealth is that people were fundamentally irrational in their personal finances. This assumption does have inspiring value, even though it might appear to be a rather bold attribution. Taffler (2018) discusses irrational decision-making from conscious and unconscious mental activity perspectives, stating these perspectives as “metaphorically only the tip of the iceberg”. While some argue that the consequences of irrational decisions are short-term anomalies, while taking a longer-term perspective, other theories such as the efficient market hypothesis, will apply (ACCA, 2018). Behavioural finance highlights many departures from the rational paradigm, and this very characteristic gives this area of study many possibilities for future evolvement. 
This research proposal will aim at discussing the complex relationship among behavioural finance and investor decision biases and mainstream theories such as efficient markets hypothesis (EMH) in accounting and finance disciplines.
Practical Motivation:
Behavioural researches on accounting and finance disciplines have practical value for both professionals and non-professionals when facing the dilemma of decision making. Behavioral finance studies show how psychological forces influence investor decisions and cause financial markets to behave inefficiently (Gokhale et al, 2015). Financial decision makers are imperfect, are prone to judgmental errors and make particular types of mistake because of decision bias. Corporate managers as investors may not follow economically rational behaviour if they are to choose socially responsible investments (SRI). To understand this investment behaviours, researches are required to analyse the certain investment decision-making process they use for evaluating both financial and non-financial factors (Nakai et al, 2018). Recent developments in behavioural finance that stresses psychological aspects of financial decision-making might shed light on analysing investor behaviour and understand issues within professional decision makers. Behavioral economics states that people’s human frailties render them as irrational economic agents. To put in another way,  because of psychological and behavioral errors in judgment, people are prone to making poor financial decisions (Smithet et al, 2016). In order to make more sensible decisions, it’s important to understand the interactions among the process of how people make decision and the behavioural impulse behind and this would be explained by study the complex relationship among behavioural finance and decision biases.
Theoretical Motivation:
Behavioural finance has very board application and content of research is very inclusive. Taffler (2018) argues that Drawing on the psychoanalytic understanding of the human psyche or ‘inner world’ which is based on well over 100 years of rich theoretical development and clinical experience, while behavioural finance directly explores the importance of unconscious and conscious mental processes in facilitating both market activity and individual financial decisions. In a divided state of mind, Taffler (2018) stresses, people employ a range of unconscious defenses against the emotional pain of having to acknowledge that their previously ‘idealised’ investments failed to meet expectation. Such mental defenses can be very powerful and entrenched which can result in delay in the market respond to the pricing implications of reality. Market-wide unconscious group processes equally play an indispensable role (Taffler, 2018). 
Behavioural fiance also pose a concern with effective market hypothesis, which principal assumptions are behaviorally unrealistic. In the strongest form of EMH, it posits that security prices accurately and timely reflect all available information and equal their fundamental economic values. Nevertheless, more recent theoretical research and empirical evidence suggest that market imperfections can cause extended periods of overvaluation and undervaluation (Gokhale et al, 2015). Arguably, perfect competition servers as a benchmark of market efficiency, while the efficient markets hypothesis demonstrates that even when all agents are fully rational, various factors and constraints can cause mis-valuation such that market and fundamental values diverge for a considerable length of time (Gokhale et al, 2015). 
Literature Review:
Over the last few decades, there has been a growing interest in researching investor behaviour in capital markets, especially in relation to how and when the behavioural pattern may impact on stock prices and, thereby, on what is commonly considered to be market efficiency. However, the field of behavioural finance is not new. Adam Smith denoted that the psychological principles of individual behavior are as profound as his economic observations (Costa et al, 2018). Modern behavioral theories developed to simulate markets typically employ models of agents that exhibit some aspects of human behavior (Sobolev et al, 2017). By so doing, they provide insight into phenomena that are not explained by classical theories. With the evolvement of theory and practice, the attention of the behavioural finance literature has recently been focused on the study of investor rationality and the implications of the cognitive processes involved in stock market investment decision-making (Fromlet, 2001). Business cycles have social psychological drivers along with their conventional macroeconomic ones. Ross (2010) suggests a strong reading of the intended upshot would be that economists should altogether abandon conventional macroeconomics and replace it by exercises in social psychology. 
Human behavior in decision-making processes has been the subject of a wide array of studies whose goal, essentially, is to discern the influence of psychological, behavioral, and cognitive aspects in decision making (Costa et al, 2018). Blasco et al (2012) states that numerous theories have been put forward to explain herding, the imitation among investors, and studies have been conducted to evaluate the presence of herding in capital markets, although the empirical results have been inconclusive.  The component of emotional herding, however, is usually identified with the emotional contagion phenomenon based on feelings and general subjective perceptions of investors (Blasco et al, 2012). The second component arises from apparent rationality in analysing information flows arriving in the market and includes the so-called rational expectations drawn from the analysis of fundamentals. It is easy to appreciate the complexity of the relationships between investor behaviour at a given moment and the amount of objective and subjective variables considered by each investor, while also bearing in mind the possibility of feed-back or circular dependency between variables (Blasco et al, 2012). Bakar et al (2014) has also research the human behaviour pattern through the perspective of so called market blue Monday hypothesis. The basic premise of this hypothesis asserts that investors are affected by systematic mood changes that cause negative pressures on Mondays and positive price pressures on Fridays (Bakar et al., 2014).
Finance from a broader social science perspective including psychology and sociology. Faced with uncertainty, people rely on heuristics or rules of thumb to subjectively assess risks of alternatives, which reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations. (Raines et al., 2011). From detailed perspective, however, research on behavioural finance can help understand irrational response in investment decision based on past returns which is asymmetric in gains and losses, with losses leading to a larger adjustment in the amount invested in future rounds (Anderson et al., 2018). 
Why financial markets are chronically subject to speculative instability, which is often relatively mild but capable of quickly turning into a speculative mania. The source of this speculative or euphoric mood is unknown, but its behavioral effects are highly observable. Raines et al (2011) suggests that the behavioural effects behind investors’ financial decision manifests that people want to quickly and effortlessly become wealthy to believing that ordinary people are intended to become rich through rising prices in financial markets. Based on the current research and the author’s assumptions, the paper presents the following hypothesis: 
Hypothesis 1: There exists an interrelationship among behavioural finance and investor decision biases which is visible to both short-term and long-term perspectives.
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