A Study on Behavioural Finance
Abstract
This research paper delves into the intriguing field of behavioral finance, exploring how psychological factors influence financial decision-making processes. Behavioral finance seeks to understand why people make irrational financial decisions despite being aware of the consequences. It bridges the gap between economics and psychology, offering insights into human behavior that traditional finance models often overlook. The study examines various aspects of behavioral finance, including cognitive biases, market anomalies, and investor behavior under different market conditions. Through a comprehensive review of existing literature and empirical studies, this paper aims to shed light on the complex interplay between human emotions, cognitive limitations, and financial markets. The findings contribute to a deeper understanding of investor behavior, potentially informing strategies for financial advisors and investors alike. This research underscores the importance of incorporating psychological principles into financial analysis, highlighting the potential for improved investment outcomes through a more nuanced understanding of human behavior.
... This inconsistency underscores the complexities of behavioural biases in financial decision-making and the necessity for further research to fully comprehend their dynamics. 3 Objectives of the study 1. To study the concepts of behavioural finance. ...
Behavioural finance is a vital field that explores how psychological factors influence market outcomes. By examining emotional and cognitive aspects of investing, it aims to enhance our understanding of how these influences affect investors. Key themes like overconfidence, cognitive dissonance, regret theory, and prospect theory highlight the intricacies of investor behaviour. This research focuses on the investment patterns of working women and the factors they consider in their financial decisions, emphasizing the significant impact of psychological influences on the decision-making process.
Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreac-tion, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique. 1998 Elsevier Science S.A. All rights reserved.
Mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities. Making use of research on this topic over the past decade, this paper summarizes the current state of our knowledge about how people engage in mental accounting activities. Three components of mental accounting receive the most attention. This first captures how outcomes are perceived and experienced, and how decisions are made and subsequently evaluated. The accounting system provides the inputs to be both ex ante and ex post cost–benefit analyses. A second component of mental accounting involves the assignment of activities to specific accounts. Both the sources and uses of funds are labeled in real as well as in mental accounting systems. Expenditures are grouped into categories (housing, food, etc.) and spending is sometimes constrained by implicit or explicit budgets. The third component of mental accounting concerns the frequency with which accounts are evaluated and ‘choice bracketing’. Accounts can be balanced daily, weekly, yearly, and so on, and can be defined narrowly or broadly. Each of the components of mental accounting violates the economic principle of fungibility. As a result, mental accounting influences choice, that is, it matters. Copyright © 1999 John Wiley & Sons, Ltd.
Using data for the period 1994-2013, we examine the return and risk-taking behavior of hedge funds having at least one female portfolio manager and funds that have all female portfolio managers. Funds with all female managers perform no differently than all male-managed funds and have similar risk profiles. For single style funds, those with mixed teams of both genders underperform male-only funds on both a raw and risk-adjusted basis, although mixed funds incur less risk and their Sharpe ratios do not differ. For funds of funds, both all-female and mixed funds have similar performance to male-managed funds. We then consider the failure rate across all fund styles. Funds with at least one female manager fail at higher rates, driven by difficulty in raising capital – these funds are smaller and are less likely to be closed to new investment. Surviving funds with at least one female manager have better performance than male-managed surviving funds, consistent with the idea that female managers need to perform better for their funds to survive. Yet, female-managed surviving funds have fewer assets under management than surviving male-managed funds. Using media mentions as a proxy for investor interest, female-managed funds receive proportionately less attention. Our results suggest that there are no inherent differences in skill between female and male managers, but that only the best performing female managers manage to survive.
Behavioral economics increases the explanatory power of economics by providing it with
more realistic psychological foundations. This book consists of representative recent articles in
behavioral economics. This chapter is intended to provide an introduction to the approach and
methods of behavioral economics, and to some of its major findings, applications, and promising
new directions. It also seeks to fill some unavoidable gaps in the chapters’ coverage of topics.
We use a stock-market game and predictions of examination marks to examine differences between overconfidence and biased self-attribution (BSA) of British and Asian students. Although different overconfidence measures show little correlation, Asians are consistently more overconfident than the British. All are equally prone to BSA.
The study compared the use of base-rate and individuating information by groups and individuals. Two hundred and forty subjects were presented with either a high or a low base rate and with descriptions of three individuals that varied in the extent to which they sounded like members of professional categories. Subjects were asked to judge the probabilities that the individuals belonged to a particular category. Subjects made their judgments either as groups, as coacting individuals, as individuals who “thought out loud,” or as individuals who did not orally report their thoughts. Results indicate that for descriptions that sounded like members of categories, the probability judgments of groups were farther from the base rate than those of individuals. Thus, group discussion appears to amplify the tendency to judge primarily by representativeness when the individuating information is informative. Conversely, for descriptions that did not sound like members of professional categories, groups were more affected by the base rate and their probability judgments were closer to it than those of individuals. The data from the group discussions and the individual protocols were consistent with the probability estimates.
According to prospect theory [Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk, Econometrica, 47, 263–292], gains and losses are measured from a reference point. We attempted to ascertain to what extent the reference point shifts following gains or losses. In questionnaire studies, we asked subjects what stock price today will generate the same utility as a previous change in a stock price. From participants’ responses, we calculated the magnitude of reference point adaptation, which was significantly greater following a gain than following a loss of equivalent size. We also found the asymmetric adaptation of gains and losses persisted when a stock was included within a portfolio rather than being considered individually. In studies using financial incentives within the BDM procedure [Becker, G. M., DeGroot, M. H., & Marschak, J. (1964). Measuring utility by a single-response sequential method. Behavioral Science, 9(3), 226–232], we again noted faster adaptation of the reference point to gains than losses. We related our findings to several aspects of asset pricing and investor behavior.