Although, behavioral finance and market efficiency are topics that may seem separate and different, they both work conjointly. Finance has always been imagined to be a subject of numbers, calculations, spreadsheets and everything that encompasses investing. By glancing over the title of this paper, one could assume that the topic is related to a psychology or behavioral class more than finance. However, by researching the topic, it is clear that finance relies on behavioral sciences and psychological understanding more than expected. In the following paper, behavioral finance will be explained properly and the different examples of behavioral finance will be listed along with some examples to illustrate the significance of behavioral finance. Following the explanation, a correlation between the topic and market efficiency will be presented to show the importance of behavioral finance.
Behavioral Finance and Market Efficiency:
Behavioral finance is a topic that is of great importance in the investment community that can be of great use for investors and corporations seeking to draw in more investors. Behavioral finance is a topic that builds a bridge that connects two different fields together and enables one field, finance, to evolve and expand into the world of psychology to enable a more efficient and stable market. To simply explain behavioral finance, it is a psychological method to better understand how individuals choose their investment outlets and make decisions financially (Qawi, 2010). With such information, a better financial environment can be created to simplify the way individuals invest their savings or spend their monies.
Behavioral finance and market efficiency are two issues that are c...
... middle of paper ...
...of the ways to identify overconfidence in an individual is lack of diversification (Jain, 2012). To recall, diversification was discussed in a previous topic that relates to the idea of including different outlets of investments within one portfolio to maximize profit with risk reduction (What is diversification, 2011). Overconfidence can be dangerous as it increases the risk factor of the investment in general and can negatively affect the investment portfolio value.
Finally, the disjunction effect is a model that can shed light and explain the market price changes and disturbance before and after presidential elections or important announcements that can be either political or economical in nature. Disjunction effect occurs when an investor decides to not take any action until the individual knows all the information regardless of its importance (Jain, 2012).
Need Writing Help?
Get feedback on grammar, clarity, concision and logic instantly.Check your paper »
- During the 20th century, academic financial economists extensively accepted the efficient market hypothesis. Almost everyone was alleged that stock markets and securities market are highly efficient in response to any new information in the market. It was argued that when information regarding factors influencing market arises, the information spread like wild fire in the market and the prices of stocks adjust accordingly without any delay. This means that neither the fundamental analysis related to analysis of financial information of the company such as earnings, capital stock etc nor the technical analysis related to the analysis of historical performance of the stocks of the company enab... [tags: Finance]
1863 words (5.3 pages)
- The aim of this report is to evaluate and validate passive investment strategies and advantages of having index funds in the portfolio. The importance of passive investment strategy is initially justified with the help of theory on efficient markets. The report then provides evidence that indexing still is a vital aspect of investment strategy and is not influenced by the efficient market theory. The report also gives a brief overview on how investors utilize indexing to minimize transaction cost by replicating the market index in their portfolio.... [tags: Management, Stocks, Funds]
1916 words (5.5 pages)
- 1. INTRODUCTION The efficient market, as one of the pillars of neoclassical finance, asserts that financial markets are efficient on information. The efficient market hypothesis suggests that there is no trading system based on currently available information that could be expected to generate excess risk-adjusted returns consistently as this information is already reflected in current prices. However, EMH has been the most controversial subject of research in the fields of financial economics during the last 40 years.... [tags: Finance]
1830 words (5.2 pages)
- The US capital market is considered as the largest and most liquid market in the world. As summarized in the study of Hail and Leuz (2009), the advantage of cross-listing on US exchanges over other exchanges can be attributed to the following reasons. First, 4In this study, ‘financial market integration’ and ‘financial globalization’ are treated as interchangeable term. 17 outside investor protection is strengthened, which allows firms to raise external finance more easily (e.g. Reese and Weisbach, 2002; Benos and Weisbach, 2004; Doidge et al., 2004).... [tags: Stock, Stock market, Stock exchange]
794 words (2.3 pages)
- Financial needs of governments inevitably lead to address such questions as who will finance it, how the optimal tax structure and tax rates ought to be. Personal income tax and its structure, mainly marginal tax rates for high-income taxpayers lie at the heart of discussions about optimal tax policy. Though no one has an exact answer for what marginal tax rates should be, lowering the highest three marginal tax brackets for personal income taxes can improve the incentives for capital formation, entrepreneurship, labor-force participation, work effort.... [tags: taxpayers, rates, capital]
586 words (1.7 pages)
- Over the past two decades, a panoply of behavioral finance research has been devoted to exploring the trading patterns of behavior and trading performance of individual and institutional investor categories over time and across exchanges. In fact, this intriguing research topic is of considerable interest to academic scholars and market practitioners alike, because it has great academic value and practical implications for industry. Specifically, capturing the trading pattern and investment performance of each investor group within a particular country can cast light on some worthwhile issues such as market composition, information transmission, asset price formation, and market efficiency a... [tags: Global Finance, Investments]
1679 words (4.8 pages)
- The Fama Critique Compared to New Research 1. Introduction Over the last couple of decades there has been a debate going whether or not there are behavioral aspects in finance. This means that financial markets are subject to different investors’ sentiments and that markets are not efficient, i.e. the efficient market hypothesis (EMH) does not hold. The supporters of EMH argue that all available information is included in the stock prices, which means that any long-term abnormal returns earned are a matter of chance.... [tags: Finance Investment Market]
1712 words (4.9 pages)
- Introduction In this research paper, we examine the distinct theories of traditional and behavioural finance, linking them to efficient market hypothesis. The scope of the paper covers market anomalies as well as behavioural biases of individuals/analysts and the impact of such on portfolio construction. Over the last two (2) decades, behavioural finance has been growing steadily. This growth is associated with the realization that investors rarely behave according to the assumptions made in traditional finance and economics.... [tags: finance theory, market nomalies]
1914 words (5.5 pages)
- How Dimensional leverages market efficiency xxxxxx xxxxxx University of the People Word count Abstract In this paper, we review and explore how the financial services firm Dimensional, leverages market efficiency to their advantage, to their clients’ advantage and to the market overall. How Dimensional leverages market efficiency Dimensional, a global investment corporation with 12 offices and a portfolio of $415 Billion dollars to manage on behalf of their investors. The Father of modern finance on market efficiency, Eugene Fama, is also one of the key people behind Dimensional.... [tags: Investment, Finance, Economic efficiency]
783 words (2.2 pages)
- Economics is probably the science that arguably has had the most impact in today’s times. In fact it can barely be called a science in a strict sense, since human behavior is not governed by laws of nature unlike other non living objects, which makes the prediction and forecasting stock prices, economic conditions all the more difficult. In recent decades economists have tried to give a more structured and mathematical explanation to their theories concerning how human beings make their decisions.... [tags: Finance]
1297 words (3.7 pages)