...Libre des Sciences Commerciales Appliquées Review of Literature Behavioral Finance Presented to Dr. Mohamed EL-Hennawy Group Assignment Prepared By Albert Naguib Noha Samir Wael Shams EL-Din Moshira Gamil Marie Zarif January 2012 | TABLE OF CONTENTS | | | |List of Table………………………………………………………………………….. | |List of Figure ………………………………………………………………………… | |List of Abbreviations/Acronyms ……………………………………………………. | |Introduction……………………………………………………………………….. | |2. Appearance of Behavioral Finance…………………………………………………… | |2.1. Important Contributors…………………………………………………. ………. | |3. Behavioral Biases…………………………………………………………………… ...
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...ABSTRACT Behavioural finance is part of finance that seeks to understand and explain the systematic financial market implications of psychological decision processes. It utilizes knowledge of cognitive psychology, social sciences and anthropology to explain irrational investor behavior that is not being captured by the traditional rational based models. INTRODUCTION Classical investment theories are based on the assumption that investors always act in a manner that maximizes their return. Yet a number of research show that investors are not always so rational. Human become puzzled when the uncertainty regarding investment decision engulfs them. People are not always rational and markets are not always efficient. Behavioral finance explains why individual do not always make the decisions they are expected to make and why markets do not reliably behave as they are expected to behave. Recent research shows that the average investors make decisions based on emotion, not logic; most investor’s buy high on speculations and sale low on panic mood. Psychological studies reveal that the pain of losing money from investment is really three times greater than the joy of earning money. Emotions such as fear and greed often play a pivotal role in investor’s decision; there are also other causes of irrational behavior. It is observed that stock price moves up and down on a daily basis without any change in fundamental of economies. It is also observed that people in the stock market...
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...Without Mr. Sandberg’s and Mr. Östebo’s contribution, this thesis would not have been possible to complete. To all the respondents: thank you for your participation! _____________ Hannes Bernéus ____________ Carl Sandberg Jönköping International Business School Date: 2008-12-11 i _____________ David Wahlbeck Bachelor Thesis within Business Administration Title: Authors: Tutor: Date: Subject terms: Behavioral Finance – Investors’ Rationality. Hannes Bernéus, Carl Sandberg, David Wahlbeck Urban Österlund 2008-12-02 Behavioral Finance, Behavioral Economics, Finance, Economic Psychology. Abstract Purpose: The purpose of this thesis is to examine if professional investors are indicating tendencies of irrational behavior when exposed to certain psychological dilemmas related to the financial world. Background: A new field within financial theory emerged in the 1980s; one which did not build on fundamental cornerstones but from the world of psychology, called Behavioral Finance. The theories within Behavioral Finance also offered a new perspective when explaining market movements. The market is determined by people who can not always be considered rational in their investment decisions, especially not during times of financial distress...
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...Concept Academic research results What it means for us Disposition Effect Shefrin and Statman (1985) predicted that because people dislike incurring losses much more than they enjoy making gains (risk aversion), and people are willing to gamble in the domain of losses, investors will hold onto stocks that have lost value (relative to the reference point of their purchase) and will be eager to sell stocks that have risen in value. They called this the disposition effect. People will hold losing positions hoping that they can close them later at break-even or better. This is how support and resistance are born! Representa-tiveness Heuristic People tend to make judgments in uncertain situations by looking for familiar patterns and assuming that future patterns will resemble past ones, often without sufficient consideration of the reasons for the pattern or the probability of the pattern repeating itself. This anomaly of human judgment, called the representative-ness heuristic, was demonstrated in a number of experiments by psychologists Tversky and Kahneman. Related concept: Overconfidence - people place too much confidence in their own judgement (e.g. thinking they know the “truth” from observing one pattern 3 times), although it is not validated. • Key reason why people use Technical Analysis, and through self-fulfulling prophecy, it becomes relevant • People get used to current market behavior, and through their actions support its continuation leads to stable market regimes ...
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...Behavioural Finance Security Analysis and Portfolio Management Behavioural Finance This is referred as a field of study that combines behavioural and cognitive psychological theory with conventional economics and finance to explain why people tend to behave in unpredictable and irrational manner. It tries to explain how investors often tend to differ from the traditional and rational economic assumptions because misrepresentation, over-confidence, biases aversion to ambiguity etc. Prospect Theory This theory states that investors pay attention to change in each transaction than the total value and have a tendency to get more distressed by the prospective losses than the happiness from prospective gains in an investment. 1. Frame Dependence: Example: 2. Mental Accounting: It explains how current and future assets are divided into different groups and therefore differently treated which explains the change in their investment decision and behaviour. Example: If given an option to buy either a piece of land at Rs.1000000 and save Rs.50000 on the deal or a car at Rs.500000 and save Rs.50000, most people will buy the car. Even though the savings is the same in both the cases, the amount saved on car is a more powerful motivator than the savings on the piece of land. 3. House money effect: This effect was given by Thaler and Johnson. Example: A set of twenty investors are given Rs.25000 and given a chance to toss where they either win Rs.10000 or lose...
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...types of students I deal with daily are street related so most of the time I tend to act out problems and situations that the grasp quickly compared to the ones in the textbook or the lesson. The whole point is to get the students to learn the lesson and achieve the TEKS. Accommodations are needed daily, once I walk the halls of the school there is another person that comes out, one that uses proper grammar, articulate every word and express to students the importance of education outside the world of Smith middle school. Cognitive behavioral theory: It focus on how we think (cognitive) and how you can change that thinking (behavior). Cognitive behavioral therapy avoids delving into the past for answers to stress or upset. It tries to give the individual mind tools o help deal with problems in the present. These theories are widely accepted and used by medical services. As I read about cognitive behavioral, I think about the transition I made from moving from one school to another school in another city. My attitude was more open minded to new ideas because I did not like my last principal due to his negative attitude towards suggestions from teachers. This year, my principal willingly accept ideas and suggestions from teachers and other staff members if they are helping the school and students head in the right directions towards an...
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...Efficient Market Discussion and Understanding of Finance As the 2013 Nobel Laureates in economic science, both of Eugene Fama, from the University of Chicago and Robert Shiller, from Yale University, have made famous contribution to the finance world. Even though their views toward market efficiency seem mutually contradictory, their theories has been highly valued by the finance academia as well as industry. This paper compares and contrasts the work of both of them and discusses how their work influence my understanding of finance. Fama is known for his work in initiating and developing the “efficient market hypothesis (EMH).” In his paper, Fama defines “efficient market” as “a market in which prices always fully reflect available information” (Fama 1970). If prices did reflect all available information, trading rules and fundamental analysis would not help investors to constantly earn abnormal return. This proposition has been checked by others and himself in the following papers: "Random Walks in Stock Market Prices (Fama 1965)," and "Filter Rules and Stock Market Trading Profits" (Blume, Fama 1966). Stock prices react to new information so quickly that it is almost impossible to trade on that piece of new information and profit from it. Furthermore, investors cannot earn abnormal returns without taking more systematic risk. To address the different types of information that stock prices could reflect, Fama prosed three types of market efficiency: (1) strong-form, where...
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...price of a security will be a good estimate of its intrinsic value.” This meant that the stock prices were changing everyday and there was no real was to predict what a stocks actual price would be in the future. Efficient market hypothesis is very controversial and often times people go against the theory. In 1191, Famas theories began to fade away. Fama began to realize that there was no possible was that the market was efficient enough to predict the price of a stock or search for an undervalued stock. A good example would be when the economy goes into a recession. There was no possible way to predict that the economy would take a down turn so fast. On the other side of the fence is the behaviorist group of economists. The behavioral finance concept is based on rational theories. The thought process is that people behave rationally and predictably. Richard Thaler, a member of the “behaviorist”school of economic thought changed this vision. He expressed concern that people tend to make irrational or stupid decisions. Thaler collected much evidence that people constantly made irrational decisions that made absoluetely no sense financially. One of his examples was a tennis player who kept playing tennis with a bad elbow even just so he...
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...Behavioral Tools Introduction When working in any business, one must have the proper tools to do the job. Counselors are in the business of helping people, and there are different tools one can use. The difference is, every person is different. Every situation people experience is unique to the individual. To be effective in the business of helping others, the professional needs to have the knowledge to access the right tools for the right situation. In this paper, team A will introduce some of the most often used tools and the real world situation they may need to be used in. These therapies include: cognitive behavioral therapy, individual psychotherapy, person-centered therapy, and medication with and without therapy. This paper is a culmination of research done by each member of the team, expressing one article or real world topic. First, the team would like to define each therapy represented. According to the web site www.medterms.com, cognitive behavior (CBT) is a short-term psychotherapy based on the concept that the way one thinks about things affects how we feel about things emotionally. The focus is on present thinking, behavior, and communication, rather than the past and teaches problem-solving skills. One way to do this is with a technique called grounding. Stating the basic facts surrounding the individual without attaching any emotion to the surrounding can help “ground” a person into focusing on the here and now. Person-centered therapy is...
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...2012 Course title: Financial Theory and Research (Part 1 – Financial Markets and Asset Pricing) Team Member: Haotian Lin; Nan Bai; Wenyi Gu; Yibo Zang Summary Standard finance (modern portfolio theory), compared with Behavioral finance, is no longer modern: dating back to the late 1950s modern portfolio theory was developed (Statman 2008) Behavioral finance offers alternative explanation for investors and markets. Behavioral finance, which has been a controversial subject and is becoming more widely accepted, is finance from a broader social science perspective including psychology and sociology (Shiller 2003). Behavioral finance helps identify the financial market’s inefficient reaction to public information, which cannot be explained by traditional financial models with assumptions such as expected utility maximization, rational investors, and efficient markets (Ritter 2003; Statman 2008). Statman (2008) compares “normal” investors and rational investors by pointing out the difference that normal investors are reluctant to realize losses since normal investors are affected by cognitive biases and emotions. Statman also compares Behavioral Portfolio Theory and Markowitz mean-variance theory. Another comparison made by Statman is between Behavioral Asset Pricing Model (BAPM) and capital asset pricing model (CAPM), stating that the asset pricing model of standard finance is moving away from CAPM toward Fama and French three-factor model, a model similar to the BAPM. Bloomfield’s...
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...Cognitive Behavioral Therapy Name: Institution: Introduction In reference to Fazio-Griffith and Ballard (2014), counselors in school settings are entitled with working with students who possess inadequate social skills. It thus becomes increasingly difficult to develop the child socially, academically and emotionally considering that these skills are vital in developing one’s social well-being. Cognitive Behavioral Therapy is at this moment defined as a model based on structured sessions and enactive performance-based procedures to give the desired changes in behavior, thinking and feeling. Application of CBT in Schools CBT provides an appropriate framework to handle disparities in children’s social development. The actual context will thus involve CBT bringing out behavioral and emotional changes in elementary children as well as adolescents in high schools. Fazio-Griffith and Ballard (2014) argue that there exists children who have problems in developing relationships with their teachers and peers. Usually, Cognitive Behavior Therapy has given an ample intervention that improves the academic and emotional level of functioning. In elementary and middle schools, social skills groups would function appropriately with CBT to induce the required social outcomes. Fazio-Griffith and Ballard (2014) state that elementary schools have deployed this strategy to handle cases of conduct disorders such as autism and cerebral palsy...
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...Dialect Behavioral Therapy Overview and Techniques This paper will provide an overview of Dialect Behavioral Therapy (DBT) history, techniques that practitioners can use while working with clients, and discuss what mental health diagnoses are most receptive to DBT techniques as well as diagnoses to avoid using DBT with. I will conclude with a short overview on my takeaway of the key practice principals of DBT based on the research conducted. Dialectic Behavioral Therapy History • Developed in the 1980s by Marsha M. Linehan to better work with individuals suffering from Borderline Personality Disorder (An Overview of Dialectic Behavioral Therapy, 2013). • DBT is a form of cognitive behavioral treatment focusing on how emotions impact an...
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...Description Treatment Focus Dialectical behavior therapy (DBT) is a system of therapy originally developed by Marsha M. Linehan, a psychology researcher at the University of Washington, to treat people with borderline personality disorder (BPD). DBT combines standard cognitive-behavioral techniques for emotion regulation and reality testing with concepts of distress tolerance, acceptance, and mindful awareness largely derived from Buddhist meditative practice. DBT may be the first therapy that has been experimentally demonstrated to be generally effective in treating BPD. A meta-analysis found that DBT reached moderate effects. Research indicates that DBT is also effective in treating patients who present varied symptoms and behaviors associated with spectrum mood disorders, including self-injury. Recent work suggests its effectiveness with sexual abuse survivors and chemical dependency. Linehan observed "burn-out" in therapists after coping with non-motivated patients who against cooperation in successful treatment. Her first core insight was to recognize that the chronically suicidal patients she studied had been raised in profoundly invalidating environments, and, therefore, required a climate of unconditional acceptance, in which to develop a successful therapeutic alliance. Her second insight involved the need for a commensurate commitment from patients, who needed to be willing to accept their dire level of emotional dysfunction. Treatment Strategies and/or Techniques ...
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...Cognitive Behavioral Therapy There are a number of methods to psychotherapy that fit within the field of cognitive behavior therapy (CBT). These methods share three theoretical perspectives: thinking or cognition affects behavior; cognitive behavior may be monitored and altered; and desired behavior change can take place through cognitive change (Piotrowski). Albert Ellis and Aaron Beck were instrumental in developing CBT. Albert Ellis established rational-emotive therapy (RET) in the 1950s; and Aaron Beck’s cognitive therapy is used universally for depression and anxiety (Strickland). Unlike Freudian psychoanalysis which emphasizes past history, CBT focuses on the client’s present situation. The CBT process begins with establishment of false perceptions and thought patterns that are the foundation of or contributing to the client’s issues. “Some self-defeating ways of thinking identified by Aaron Beck include all-or-nothing thinking, magnifying or minimizing the importance of an event; overgeneralization (drawing extensive conclusions from a single event); personalization (taking things too personally); selective abstraction (giving disproportionate weight to negative events); arbitrary inference (drawing illogical conclusions from an event); and automatic thoughts (habitual negative, scolding thoughts, such as “You can’t do anything right”).” (Strickland). Following establishing false perceptions, the therapist assists the client in changing those negative perceptions...
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...From Efficient Markets Theory to Behavioral Finance 1. What does Shiller mean by Behavioral Finance? Behavioral Finance is the collaboration between finance and other social sciences. This field of research is focused on determining the precise degree to which various market forces—including rational analysis of company-specific and macroeconomic fundamentals; human and social psychology; and cultural trends—influence investors’ expectations and determine their level of confidence or fear. Behaviorists believe that at times, the real determinants of stock market movements are the forces of human and cultural psychology, oranimal spirits (a term coined by economist John Maynar 2. How does Behavioral Finance contrast with Efficient Market Theory? Behavioral finance takes issue with two crucial implications of the EMH: (1) that the majority of investors make rational decisions based on available information; and (2) that the market price is always right. Behaviorists believe that numerous factors—irrational as well as rational—drive investor behavior. In sharp contrast to efficient markets theorists, behaviorists believe that investors frequently make irrational decisions and that the market price is not always a fair estimate of the underlying fundamental value. Still, many proponents of behavioral finance agree with at least one implication of the efficient market theory—that it’s not possible to reliably earn abnormal returns. 3. What prediction does Efficient...
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