The Effect Of Investor's Systematic Bias In Decision Making On The Tail Of The Return Distribution And Its Empirical Research

The Standard Finance Theory holds that investors are rational, and the security market is efficient due to the possibility of perfect arbitrage, even if most of the investors are irrational. On the contrary, Behavioral Finance contends that investors bias in their decision making systematically, and there isn't such a thing as perfect arbitrage in the actual market; as a result, these biases will have a bearing on the distribution of the return. From the perspective of Behavioral Finance, this paper researches on the reasons for the fat-tail of the return. Undoubtedly, this research is of great significance to the supervision of finance and risk management.Investors produce biases systematically in their decision making. Debont and Thaler believe that overconfidence is one of human being's most stable psychological characteristics and their evidences show that people are overconfident of the probabilities of occurrences of uncertain events in their decision making. Regret aversion is a universal mentality. People often feel great regret for their wrong decisions. Loss is painful and regret is the feeling that people themselves must be responsible for the loss. Regret is consequently more painful than the loss itself. Regret Aversion refers to the fact that people exhibit irrational behaviors in order to avoid regret in case they bias in their decision making. Aversion to ambiguity reveals the phenomenon that people prefer to do the things they are familiar with, when they are faced with the choice between the familiar and the unfamiliar things to do. Psychological biases such as these will mislead investors to a series of systematic biases in their decision making: overreaction, under-reaction, confirmation biases and disposition utility, etc. Overreaction denotes that investors may understand and react to the information in a biased way, and thus overweighting and overreacting with the information. Investors'overweighting of certain information will result in disproportional magnitude of price fall at bad news, and of price rise at good news in the stock market. Under-reaction means the opposite phenomenon that people react to the information inadequately, also known as conservatism. It refers to the fact that people have inertia in their thinking, and is reluctant to change their former belief. Therefore, people don't modify their belief to an appropriate degree when new information arrives. Confirmation bias involves the fact that once people have a priori belief, they will consciously search for favorable evidences to support or validate their belief, and sometimes even go so far as to distort new evidences. In this way, people...