Behavioral Finance According to Different Points of View

Published: 2021-09-13 21:05:10
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Kahneman & Tversky (1974) identified heuristics as systematic biases in financial investment-decisions. Patrick & Charles (2011) said that people frequently rely on rules of thumb or heuristics rather than rational analysis to evaluate risks in face of uncertainty. Trivers (1985) raised this point that the true internal states cannot completely controlled by irrational investors. Zhang & Zheng (2015) said that these biases cannot be improved or eliminated by studying and accumulating experiences. Foad (2010) found that other researchers have studied familiarity bias in both the domestic and international situations. In both cases, familiarity bias arises when individuals hold an investment biased toward “familiar” assets compared to an unbiased investment resultant from a hypothetical model or practical data.
Patrick & Charles (2011) describe representativeness like A represent B through assessed possibilities, which A resembles B. Tversky & Kahneman (1974) refers that representative is based upon two main biases, one of them is Investor’s ignorance of the former probabilities and the sample is chosen because of over-stress on one characteristic. Investor’s ignorance to the importance of the size of the sample is the other bias. Kahneman & Tversky (1972) said it refers to determine the provisional probabilities. Thus, representativeness bias fallout as investors classifying an investment as good or bad based on its current performance. therefore, they purchase the stock after prices have increased considering that they will continue to increases and ignore stocks while their current prices are below their real intrinsic values. Park (2010) find a significant impact of confirmation bias in Korean stock market that makes investors more confident and badly affect their investments.Plous (1993) confirmation bias is a trend to authenticate one’s believes and assumption despite of the fact whether the information is true, which leads to statistical errors. Fall (2000) found that confirmation bias can give reason to investors to look for only information that match to their beliefs about an investment that they have done and not to look for the information that may disagree with their beliefs. Pompian (2006) proposes that confirmation bias can direct individuals to be overconfident; consequently their investment approach will lose money. Hirshleifer (2001) unforeseen events occur due to over confidence. Liu (2006) said that over-confidence is when people over-evaluate their chance of success and accuracy of the information they get. Alpert & Raiffa (1982) argued that the investor’s confidence rate of 98% contain the actual quantity of only 60% in reality. Griffin & Tversky (1992) declared that experts have a tendency to be more overconfidence than ordinary investors when evidence is uncertain and predictability is low.
Kahneman & Reiepr (1998) affirmed that investors would like to reduce the margin of error on future stock index under the influence of overconfidence. Wu (2004) explains that in the influence of over confidence investor over-weights information as a result of irrational bias. Russell (2000) said that at least 10% of investor over-reacts when making decision related to investments. De Bondt & Thaler (1995) suggested that over-confidence may be one of the stable human psychologies, which causes biased judgment on uncertainty events. They also conducted an in-depth study on over-reaction in the article “Does the stock market overreact?” and argued that investors does not make rational decisions as assumed they more often over react to new information and ignore long-term Information. In comparison institutional investors are tend to be under-reaction, which means they are usually confident at their judgment and don’t change their minds easily. Barber and Odean (2001) found that males are more overconfident than females as they trade more and earn lower returns in USA.
Bashir (2013) found that there is no major difference between the Ereaction of men and women while decision making regarding overconfidence bias in Pakistan. Onsomu (2014) conducted research in Kenya and found no significant impact of overconfidence bias but investors were effect by other biases. (Liu, 2006) describes that the investors usually reduce uncertainty with some reference points and reach a decision through appropriate adjustment. Patrick and Charles (2011) argue that the investors with this bias would like to assume the rough correct of stocks’ current price, resulting in certain biases. Lovric (2008) described that the adjustment of this bias is always inadequate which will cause over-dependence on the anchor price. Tversky & Kahneman (1974) found that people have a tendency to be controlled by meaningless “initial anchor”.
De Bondt & Thaler (1985) argued that investors usually believe that the past events will occur continuously, over- negative on loser and over-positive on winner, causing the variation from true value of stocks. Rabin (1999) stated that this effect occur when the investor ignore the importance of the size of the sample resulting in obtaining conclusion on the basis of small data sets. Andreassen & Kraus (1990) argue that the investors like to buy on lows while sell on rises when the price fluctuates, which is in consistence with gambler’s fallacy. They also provided evidence to show that this kind of trick is less used by the investors who likes to prefer following trends when an reliable trend appears.
Patrick & Charles (2011) argue that availability bias means that people often assess the chances of happening of an event based on the recalled past event rather than actual data collection. Fischhoff, Slovic, & Lichtenstein (1978) pointed out that people often does not consider the chances of happening of an indirect or invisible event. Shiller (1984) also pointed out that the minds of investors can be easily changed by other people, especially so-called experts. Tversky & Kahneman (1974) found that the investors would forecast higher probability of upward trend of a stock in the influence of the media publicity. Barber and Odean (2008) conducted a research on US stock exchanges and found that investors tend to consider stocks that have recently caught their attention in making purchase decisions. Li (2012) the feeling of loss is more intense than the wining an investment.
Barberis & Huang (2001) found that loss aversion can result in more variation in stock prices. Barberis (2001) found that loss aversion bias can help explain equity premium puzzle where investors usually require a high return to long-term hold stocks. Fish (2012) finds that women are more loss averse than the men, his research was based on USA investors. Montier (2002) stated loss aversion bias as trend that people generally feel a stronger desire to avoid losses than to attain gains. Barber and Odean (1999) said that Loss aversion consist of another thought that the individuals try to avoid end up on loss, and desire to end up on profit. Mathews (2013) defines this bias as division and compartmentalization of related activities exercised by individuals direct them to take incorrect or loss-making decisions. Thaler and shefrin (2013) explained Self Control whereas investors are subject to temptation and they look for tools to improve self control.
By mentally separating their financial resources into capital and ‘available for expenditure’ pools, investors can control their urge to over consume. Mathew (2013) defines this bias as an inaccurate belief of investors that they can implement control. Chen (2007) conducts a study on the Chinese stock exchanges and found that investors are more often affected by the disposition bias. Shefrin and Statman (1985) said that the disposition effect shows that investors tend to sell winnings investments too quickly and hold losing investments too long. Mobarek (2014) found a major common herding behavior across the major stock markets in Europe. Hirshleifer and Teoh (2003) stated that Herding bias in monetary markets can be distinct as mutual replication leading to a union of action.

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