Behavioral Finance and Investment Strategy
Edited book (chapter)
Chapter Title | Behavioral Finance and Investment Strategy |
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Book Chapter Category | Edited book (chapter) |
ERA Publisher ID | 3337 |
Book Title | Investment Management: A Modern Guide to Security Analysis and Stock Selection |
Authors | |
Author | Krishnamurti, Chandrasekhar |
Editors | Vishwanath, S. R. and Krishnamurti, Chandrasekhar |
Page Range | 627-634 |
Chapter Number | 28 |
Number of Pages | 8 |
Year | 2009 |
Publisher | Springer |
Place of Publication | Germany |
ISBN | 9783540888017 |
Digital Object Identifier (DOI) | https://doi.org/10.1007/978-3-540-88802-4_28 |
Web Address (URL) | https://link.springer.com/chapter/10.1007/978-3-540-88802-4_28 |
Abstract | [Chapter Introduction and Objectives]: Clearly, not every choice investors make is in their best interest. While emotions like fear and greed play a role in poor decisions, there are other causes of irrational This chapter has the following objectives: • Introduce the application of behavioral finance in constructing investment strategies In the chapters that preceded, we presented two broad approaches to security analysis. Fundamental analysis involves analysis of financial statements, strengths, and A third branch called behavioral finance has emerged in the recent years as the third approach to investment analysis. It uses psychology to explain investor behavior that cannot be explained with traditional financial and economic theory. Traditional economic theory rests on the sensible assumption that investors make purely rational decisions. A rational decision, as defined by an economist, is one But was their underlying assumption correct? Do investors actually make purely analytical decisions devoid of emotion? Studies analyzing historical trades generated In the same way that the fields of macroeconomics and microeconomics simply reflect different scales or cosmoses of activity, man, or the individual investor, is a The history of markets can even be seen as a complex set of recurrent human errors. We know the market habitually overreacts or underreacts. Behavioral finance provides an alternative explanation to some of the anomalies outlined in the chapter on market efficiency. It takes into account how real (different) people make decisions. Some of the irrationalities may arise because investors do not always process information correctly, and, hence, derive incorrect future distributions of returns. This results in arbitrage opportunities. Even while knowing the true distribution of returns, investors can make suboptimal decisions. Consequently, arbitrage is limited. There are three different and distinct symptoms of the market which correspond to how participants feel (psychologicals), think (fundamentals), and act (technicals). By studying and measuring these three components, experts in behavioral finance arrive at a comprehensive analysis of the market. Each of these market functions are always in disequilibria to some degree. These persistent disequilibria result in systemic investing errors. Identifying the errors of other market participants, in turn, leads to investment opportunities. Some central issues in behavioral finance are why investors and managers (and also lenders and borrowers)make systematic errors. It shows how those errors affect |
Keywords | behavioural finance; behavioral finance; finance; behaviour; behavior; investmenet strategy' investments; strategies |
ANZSRC Field of Research 2020 | 350202. Finance |
Public Notes | Files associated with this item cannot be displayed due to copyright restrictions. |
Byline Affiliations | Auckland University of Technology, New Zealand |
https://research.usq.edu.au/item/9z79w/behavioral-finance-and-investment-strategy
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