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Research On Investor Psychology And Anomalies Of Investing Behavior

Posted on:2006-10-22Degree:MasterType:Thesis
Country:ChinaCandidate:X C YuanFull Text:PDF
GTID:2179360182967194Subject:Finance
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While studying investor behavior, the classical finance theories of which Efficient Market Hypothesis is representative, firstly suppose an ideal market with complete rational investors, then inquiry what investors should do, and it is a kind of method which is from the subjective to the objective. But extensive experimental evidence shows that due to some inherent cognitive biases of investors, their investing decision processes and results are very different from the optimal decision models in the classical finance theories. Behavioral Finance Theory broke the set pattern of the classical finance theories, depending on studies of mankind decision-making psychology, research into "how agents make investing decisions actually" .This paper bases on the analytical framework of Behavioral Finance, investigates the psychological factors behind the individual investors behavior, points out because of the Heuristics, investors will encounter Availability bias, Representativeness bias, Anchoring and Adjustment bias, along with the influence of Overconfident, making the biases in beliefs occur when investors are making judgments under uncertainty, and investors will update their beliefs in a biased way. At the same time, because of the influence of Framing, preferences of investors follow the Prospect Theory when they are making decisions under risk. The value is defined on gains and losses from the reference point, and investors are Loss Averse. In addition, Mental Accounting, Ambiguity Aversion and Regret Aversion also make preferences of investors deviate the classical rational theories. This paper also analyzes the cause of Herd Behavior, points out communication in the crowd will make information cascade, then cause the behavior of mass investors converge. At the same time, conformity will also make the individual investors abandon private information and follow the investing decision in accordance with the most agents.By virtue of the behavioral analytical tools such as Mental Accounting, Overconfidence, Loss Aversion, Regret Aversion, House Money Effect, etc., this paper analyzes the Anomalies of investing behavior in portfolios choosing, trading, buying or selling decision and intertemporal investing choice from different angle of view, points out Mental Accounting and the Preference for Familiar make the portfolios of investors resemble layered pyramids and insufficient diversification; Overconfidence makes investors trade too much, undertake larger risk and gain lower returns; Loss Aversion and Regret Aversion cause investors sell winners too early and ride losers too long; Prior gains and losses in investing and Endowment both have an effect on the present investing decision of investors.As for the investing behavior of Chinese investors, empirical results show that anomalies of investing behavior such as excessive trading, disposition effect and herd behavior not only exist, but more seriously. In addition, Chinese investors present the serious policy-dependent mentality, we analyze what make this kind of phenomenon occur, point out it will cause market overreact to policy news, meanwhile the investing behavior of investors will be short-term.Drawing lessons from studies of investor psychology and behavior, investors can aim at to avoid making mistakes in the investing process, and the market regulators then can develop our stock market normatively by reasonably leading the behavior of investors and reducing the excessive intervention of policies to the market. Finally, this paper discusses the future research areas in studies of investor behavior.
Keywords/Search Tags:Behavioral Finance, Cognitive Biases, Herd Behavior, Anomalies of Investing Behavior
PDF Full Text Request
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