Study On The Investors' Irrational Behaviors In Securities Market

Standard finance theories put forward the Efficient Market Hypothesis, Portfolio Theory, Capital Asset Pricing Model, Arbitrage Pricing Theory, Black-Scholes Option Pricing Theory and a series of classical theory, and built a sound system of financial theory. So they had long been recognized as the mainstream financial theory. They thought irrational phenomenons which appear in the financial market are temporary and will eventually be expelled by the power of rationality. But the studies on irrationality were scattered and are not composed of a unified theory, so that they were always marginalized. They, become unpopular until the advent of prospect theory. And their developments have sprung up everywhere.The recent finance crisis triggered by the United States deeply hit the global economy and finance almost. We get a lot of experiences and lessons from this crisis. Among them, the performances of investors in the stock market including trading blindly, overreaction to information and so on surprise us. So we have to attach importance to the role of irrational factors in the stock market. In such a context, the article is based on behavioral finance theory and mainly discusses seven parts to complete the study on irrational behavior of investors. I will briefly describe as follows:Part I is a preface of this article. In this part we first describe the background to the study, the presentation of related questions, the purpose and significance of the study, introduce the main structure of ideas and a brief overview of arrangements about this paper, review the related literature at home and abroad, and finally put forward some innovations and shortcomings in this paper.Part II defines the concept of the rationality and irrationality. By comparison analysis, we arrive at a rational investor in this paper that refers to comply with the following four conditions:(1) the relationship between the preferences of individual investors are rational; (2) In the uncertain economic conditions, investors see the Von Neumann-Morgenstern utility function maximization as the ultimate goal of the decision-making; (3) investors comply to Bayes rule for information learning and information adjustment; (4) investors are always risk-averse. As long as investors violated any condition of the above, we believe investors are irrational. And we think the irrationality is identical to the bounded rationality.Part III discusses the issues on survival of irrational investors. The standard finance theories think irrational investors are droved out stock market finally by rational investors. Rational investors control the formation of asset prices through the arbitrage mechanism. But the role of irrational investors in the formation of asset prices is insignificant, even negligible. However the behavioral finance theories hold that the arbitrage mechanism can not play a role, that irrational investors can create a risk from which they are able to get own profit. In reality, there are many anomalies in capital market which standard financial theories are difficult to give a convincing explanation, such as date effect, little firm effect, dividends puzzle, equity premium puzzle and so on, which provides a powerful proof for the long-term existence of irrational investors. Finally, the paper agrees that irrational investors can be long-term existence in the financial markets, that theirs importance should not be ignored.Part IV introduces the prospect theory. The prospect theory is the core of theories on the study of investor behavior. We describe the background that the prospect proposed, the criticism of the prospect theory to the expectation utility theory, the decision-making mechanism of the prospect theory. In addition, there are two important function in the prospect theory, value function and weight function. The prospect theory for the study of investor behavior is as important as the expectation utility theory in the role of standard finance theory. It can not only explain the phenomenon the expectation utility theory can, but also can explain which the expectation utility theory can not.Part V mainly illustrates investors'cognition biases and psychology biases in stock market. Investors in the process of dealing with clutter information flow will inevitably lead to a variety of cognition biases and psychology biases, which affect their judgments. Kahneman and Tversky (1981) hold that people in the decision-making under uncertainty will encounter representativeness, heuristics, availability heuristics, anchoring and adjustment heuristics, frame dependence. In addition, the behavioral finance scientists also advanced other cognition biases concept, such as confirmation bias, self-attribution bias. They believed people are used to employing the above judgment approaches to make decision. These judgment approaches, although simple, direct, are prone to error. In addition, investors in stock market will easily generate over-confidence, loss aversion, regret aversion, mental accounts, conformity, and other psychology biases. These cognition biases and psychology biases are the underlying causes to producing irrational behaviors.Part VI deeply elaborates irrational behaviors of investors in stock market. This part is most important in whole article. Investors may overreact or under-react due to a abnormal response to the information,may excessively trade because of overconfidence, may produce disposition effect for some psychology biases including loss aversion, regret aversion, mental'accounts, may yield herding behaviors owing to emotion contagion and conformity. These irrational behaviors is difficultly explained by the stander finance theories, but can be reasonably explained by psychology. In this part we exhibit the market performances of various irrational behaviors in stock market and oversea researches model and empirical thinking related to these irrational behaviors.Part VII shows some policy enlightenments and strategy recommendations from the standpoint of the irrational behavior. For the Chinese stock market instruction, we advance some suggestions, such as perfecting the information disclosure system, launching an effective short selling mechanism, improving issuing system, strengthening delisting system, expanding the ranks of institutional investors, deepening education to small and medium investors, raising supervision level and intensifying legal sanctions. In addition, we present some strategies for ordinary investors, such as cost averaging strategy, time diversification strategy, contrary investment strategy, momentum trading strategy, stop loss strategy.Finally, this paper comes to five conclusions which are mainly about how to treat the irrationality and related policy recommendations and suggestions.