Research On Individual Behavior And Its Bias

Behavioral finance focuses on the investors' psychology and their biases in the process of decision making under uncertainty. The rising of behavioral finance, which assumes the investors to be irrational and psychologically biased, challenges the domination of EMH, and starts a methodological revolution in the field of finance. Although behavioral finance is still in its infancy, it has presented financial economics with a new body of theory, a new set of explanations for empirical regularities, as well as a new way to predict. At the most general level, behavioral finance is the study of human fallibility in competitive markets. It does not deal with an observation that people are biased, but places these biases into competitive financial markets instead. It also examines what happens to prices and other dimensions of market performance when different types of investors trade with each other. This means the financial markets in real world are far from perfect.As a study of human fallibility in competitive markets, behavioral finance theory rests on two major foundations. One is limited arbitrage and the other is investor sentiment. Researchers understand a lot more about limits of arbitrage than investor sentiment. Part of the reason is that the theory of limited arbitrage is based on the behavior of rational actors, which is easy to model for economists. But there is no obvious way to model investor sentiment and investigate how the investors in real world actually act form their beliefs and valuations, especially their demands for securities. So the research on investor sentiment has been more tentative. This thesis focuses on investors' sentiment and their biases.Since the domestic financial market has been developing and with short history, investor sentiment will be much influential and decisive than they are in the developed markets. This research, based on work of field study, explores the content of irrational behaviors of an individual investor and its possible bias from irrational behavior incorporates a rational process in virtue. In chapter 2, I discuss the concept of rational and irrational, describe the theory of rational and prospect theory and introduce the importance of mental accounting. Chapter 3 begins with the uncertainty of commercial markets and analyzes the reason why financial market has higher uncertainty. Under uncertainty, individual's preferences and beliefs conform heuristics rather than Bayesian rationality. I develop a new interpretation related to division of labor and specialization of the markets, and show the nature of rational behaviors. Chapter 4 shows the sentiments and rules of individuals while they buy and sell the stocks. It reveals that an individual's behavioral portfolio is based on the building of mental accounting, which is the process of individual's self-control. Then I briefly discuss the importance of individual's knowledge accumulation in financial innovation, especially the role of the entrepreneur in Chapter 5. This kind of backward alertness and forward alertness, as well as entrepreneur, take a leading role in financial innovation. The concluding chapter summarizes some findings of this research, and shows the importance of the approaches on behavioral finance and the field study. In addition, it discusses some open problems that deserve for further research.