Herd Behavior and the Housing Bubble Paper instructions:
You have been offered the following two choices— Choice A: Using behavioural finance, discuss and justify the choice that the majority of people would choose i.
Various theories exist to explain why long periods of growth in the price of shares are followed by sudden falls or market crashes. Evaluate the relevance of behavioural finance theory to the build up to the Dot. Introduction In this essay I will be talking about behavioural finance and its increased popularity in recent academic literature.
First I will give a brief description of what behavioural finance is. Basically behavioural finance is the study and theory that looks into why investors sometimes choose to ignore more traditional investment theory, such as the Efficient Market Hypothesis EMHand invest into projects that do not look economically sound or do not offer the most attractive returns.
Behavioural finance attempts to incorporate elements of psychology into finance to better understand investor behaviour. Essentially, behavioural finance operates under the assumption that all investors are not rational.
I will also attempt to explain why some investors would not follow others and opt for option B. The main reason why many people will undertake option A is simply because it is the most rational choice to make.
This is consistent with much of the traditional market theory. Without this assumption the models would collapse. Another reason why most investors will take option A is the absence of risk.
Again, this is consistent with traditional market theory that states that investors will favour projects with the least amount of risk if the projects being considered all return the same amount of money. Many authors have observed that some investors will simply invest in a project because that is what everyone else is doing.
This leads to the assumption that these investors are not rational as none of the market data or theory is being considered in their investment decision.
This leads into the area of behavioural finance to try to explain the actions of these investors.
I will now discuss why some investors choose option B. If all investors were rational then every investor would choose option A and they would choose it for the correct reasons.
However, as I have already mentioned, not all investors are rational. This is the main reason for some investors choosing option B. Behavioral Finance Behavioral finance attempts to explain what, why, and how of finance and investing from a human perspective. More specifically, behavioral finance integrates psychology and economics into the study of human judgment and biases in decision making under conditions of uncertainty.
Herding behavior is one of the prominent biases in the field of behavioral finance which affects the market efficiency. The rational investor always wants to buy low and sell high, but the instincts of herding push investor to buy what others are buying and sell what others are selling irrespective of their own analysis and information what.
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Behavioural finance is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets.
Behavioural finance is of interest because it helps explain why and how markets might be inefficient. Sports journalists and bloggers covering NFL, MLB, NBA, NHL, MMA, college football and basketball, NASCAR, fantasy sports and more. News, photos, mock drafts, game.
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