A review paper on behavioral finance: study of emerging trends
15 May 2019-Qualitative Research in Financial Markets (Emerald Publishing Limited)-Vol. 12, Iss: 2, pp 137-157
TL;DR: In this paper, a comprehensive review of literature in favor, as well as against the long held belief of market efficiency is presented, highlighting the gaps in the market efficiency and also suggesting how these gaps can be bridged with a superior approach such as behavioral finance.
Abstract: This paper participates in the debate on market efficiency and correct approach for asset pricing through a comprehensive review of literature in favor, as well as against the long held belief of market efficiency. The purpose of this paper is to understand emerging trends in behavioral finance and establish its future potential as a mainstream alternative theory of asset pricing.,The review and discussion of literature is mainly divided into three different sections that are –theories supporting efficient market hypothesis (EMH); studies providing evidences from the stock market on the failure of EMH and studies on behavioral finance, discussing separately investors’ behavioral biases keeping in mind their effect on stock prices; and providing empirical evidences on the effect of investor sentiment on stock prices.,The review of literature from both the point of views has helped in understanding the market efficiency issue and changing dynamics of asset pricing approach. This is achieved by highlighting the gaps in the concept of market efficiency and also suggesting how these gaps can be bridged with a superior approach such as behavioral finance. Through further discussion of emerging trends in behavioral finance, the paper also points out gaps and how these can be abridged, for behavioral finance to be accepted as a mainstream alternative approach to EMH.,This is an extensive and one of a kind study that discusses market efficiency through discussion of EMH and behavioral finance side by side. With the help of such a study, researchers can precisely understand the need and can focus on the future course of action to make behavioral finance a mainstream approach to asset pricing.
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TL;DR: In this article, the authors investigated the influence of eight behavioral biases: overconfidence and self-attribution, over-optimism, hindsight, representativeness, anchoring, loss aversion, mental accounting, and herding on the trading activity and recommendation intentions of millennials during the COVID-19 pandemic.
Abstract: Behavioral biases are known to influence the investment decisions of retail investors. Indeed, extant research has revealed interesting findings in this regard. However, the literature on the impact of these biases on millennials' trading activity, particularly during a health crisis like the COVID-19 pandemic, as well as the equity recommendation intentions of such investors, is limited. The present study addressed these gaps by investigating the influence of eight behavioral biases: overconfidence and self-attribution, over-optimism, hindsight, representativeness, anchoring, loss aversion, mental accounting, and herding on the trading activity and recommendation intentions of millennials during the pandemic. An artificial neural network approach was used to analyze the data collected from 351 millennial men in Finland. The results revealed that herding, hindsight, overconfidence and self-attribution, representativeness, and anchoring influence both trading activity and recommendation intentions, albeit to varying extents. Notably, loss aversion and mental accounting influence only the recommendation intentions. Furthermore, the relationship of the two endogenous variables is nonlinear with herding, representativeness, and anchoring but is linear with other biases. In addition to the quantitative study, we also conducted a post hoc qualitative study with 19 millennials to evaluate the persistence of behavioral biases among them through the pandemic. (PsycInfo Database Record (c) 2021 APA, all rights reserved)
22 citations
TL;DR: In this paper, the authors investigated the impact of investor rationality or irrationality on the influence on countries and sectors' stock market sector returns of the US, Europe, and their main countries most affected by the pandemic.
Abstract: Although some studies recently address the association between COVID-19 sentiment and returns, volatility, or stock trading volume, no one conducts an analysis to measure the impact of investor rationality or irrationality on the influence on countries and sectors' returns This work creates a text media sentiment and combines its influence with the outbreak cases on the stock market sector returns of the US, Europe, and their main countries most affected by the pandemic This allows us to perceive the ranking impact of rationality or irrationality on country and sector stock returns This work applies a random-effects robust panel estimation, with an M-estimator This paper concludes that US returns are more sensitive to sentiment, and thus more prone to irrational factors than confirmed cases compared to Europe and that country factors influence the returns differently In Italy and Spain as the most punished countries in Europe apart from the UK, present sector indexes return more reactive to verified cases, or rationality, namely, tourism, real estate, and the automobile (this last one in Italy) The importance of this work resides in providing a new in-depth analysis of irrational behavioral metrics among countries, which allows for comparison Moreover, it allows observing which sectors' and which countries' asset returns are most sensitive to rational or irrational expressions of events, allowing for arbitraging, financial planning for investors, decision-makers, and academia on an in and out of pandemic context © 2020 LLC CPC Business Perspectives All rights reserved
10 citations
TL;DR: In this paper, the impact of behavioral biases on herding for Islamic financial products with the mediation of shariah literacy was investigated, and the results for the direct impact showed that self-attribution, illusion of control, and information availability have a positive and significant impact on the herding in Islamic financial markets, while shariah education showed an insignificant impact on them.
Abstract: The study aimed to investigate the impact of behavioral biases on herding for Islamic financial products with the mediation of shariah literacy An adopted questionnaire from several published studies was used to collect data The data were collected from 410 respondents and were analyzed with SmartPLS The results for the direct impact showed that self-attribution, illusion of control, and information availability have a positive and significant impact on herding for Islamic financial products while shariah literacy showed an insignificant impact on herding The results for mediation showed that previously significant and positive impact turned to insignificant when shariah literacy was introduced as mediating variable between the illusion of control, self-attribution, information availability, and herding From a theoretical perspective, this study would contribute to the existing body of knowledge of financial decision making from shariah literacy point-out On the other hand, the findings of this study may be useful for investors to avoid herding in the Islamic financial markets The authors synthesize the contribution made by behavioral finance studies in extending the knowledge of herding behavior in Islamic financial products with a mediating role of shariah literacy The key limitation of the study includes data that were collected from three districts of Punjab, Pakistan
5 citations
TL;DR: In this paper, the authors apply a grounded theory approach to develop a theory of resistance to change in the financial management of Laotian family firms, using a theoretical sampling procedure.
Abstract: The purpose of this study is to apply a grounded theory (GT) approach to develop a theory of resistance to change in the financial management of Laotian family firms.,The research adopts a GT approach, using a theoretical sampling procedure. Interviews were conducted with 36 Laotian family firms between April 2017 and May 2019. The in-depth interview transcriptions were analyed using open coding, axial coding and selective coding.,The interviewees identified that strategic planning, budgeting and management processes are factors influencing resistance to change. Research results show that accounting portfolios, investment decisions and return on assets are aspects of financial management that are particularly prone to change. The authors, therefore, suggest that Laotian family firms’ reduction in confidence and loss aversion may activate resistance to the adoption of more efficient financial management practices.,To the best of the authors’ knowledge, this is the first research to attempt to use grounded data to emerge a theory of resistance to change in financial management in Laos.
5 citations
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TL;DR: Efficient Capital Markets: A Review of Theory and Empirical Work Author(s): Eugene Fama Source: The Journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969 (May, 1970), pp. 383-417 as mentioned in this paper
Abstract: Efficient Capital Markets: A Review of Theory and Empirical Work Author(s): Eugene F. Fama Source: The Journal of Finance, Vol. 25, No. 2, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association New York, N.Y. December, 28-30, 1969 (May, 1970), pp. 383-417 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/2325486 Accessed: 30/03/2010 21:28
18,295 citations
TL;DR: In this paper, the authors present a body of positive microeconomic theory dealing with conditions of risk, which can be used to predict the behavior of capital marcets under certain conditions.
Abstract: One of the problems which has plagued thouse attempting to predict the behavior of capital marcets is the absence of a body of positive of microeconomic theory dealing with conditions of risk/ Althuogh many usefull insights can be obtaine from the traditional model of investment under conditions of certainty, the pervasive influense of risk in finansial transactions has forced those working in this area to adobt models of price behavior which are little more than assertions. A typical classroom explanation of the determinationof capital asset prices, for example, usually begins with a carefull and relatively rigorous description of the process through which individuals preferences and phisical relationship to determine an equilibrium pure interest rate. This is generally followed by the assertion that somehow a market risk-premium is also determined, with the prices of asset adjusting accordingly to account for differences of their risk.
17,922 citations
TL;DR: In this paper, Bhandari et al. found that the relationship between market/3 and average return is flat, even when 3 is the only explanatory variable, and when the tests allow for variation in 3 that is unrelated to size.
Abstract: Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in 3 that is unrelated to size, the relation between market /3 and average return is flat, even when 3 is the only explanatory variable. THE ASSET-PRICING MODEL OF Sharpe (1964), Lintner (1965), and Black (1972) has long shaped the way academics and practitioners think about average returns and risk. The central prediction of the model is that the market portfolio of invested wealth is mean-variance efficient in the sense of Markowitz (1959). The efficiency of the market portfolio implies that (a) expected returns on securities are a positive linear function of their market O3s (the slope in the regression of a security's return on the market's return), and (b) market O3s suffice to describe the cross-section of expected returns. There are several empirical contradictions of the Sharpe-Lintner-Black (SLB) model. The most prominent is the size effect of Banz (1981). He finds that market equity, ME (a stock's price times shares outstanding), adds to the explanation of the cross-section of average returns provided by market Os. Average returns on small (low ME) stocks are too high given their f estimates, and average returns on large stocks are too low. Another contradiction of the SLB model is the positive relation between leverage and average return documented by Bhandari (1988). It is plausible that leverage is associated with risk and expected return, but in the SLB model, leverage risk should be captured by market S. Bhandari finds, howev er, that leverage helps explain the cross-section of average stock returns in tests that include size (ME) as well as A. Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) find that average returns on U.S. stocks are positively related to the ratio of a firm's book value of common equity, BE, to its market value, ME. Chan, Hamao, and Lakonishok (1991) find that book-to-market equity, BE/ME, also has a strong role in explaining the cross-section of average returns on Japanese stocks.
14,517 citations
TL;DR: Cumulative prospect theory as discussed by the authors applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses, and two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting function.
Abstract: We develop a new version of prospect theory that employs cumulative rather than separable decision weights and extends the theory in several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses. Two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment confirm a distinctive fourfold pattern of risk attitudes: risk aversion for gains and risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low probability. Expected utility theory reigned for several decades as the dominant normative and descriptive model of decision making under uncertainty, but it has come under serious question in recent years. There is now general agreement that the theory does not provide an adequate description of individual choice: a substantial body of evidence shows that decision makers systematically violate its basic tenets. Many alternative models have been proposed in response to this empirical challenge (for reviews, see Camerer, 1989; Fishburn, 1988; Machina, 1987). Some time ago we presented a model of choice, called prospect theory, which explained the major violations of expected utility theory in choices between risky prospects with a small number of outcomes (Kahneman and Tversky, 1979; Tversky and Kahneman, 1986). The key elements of this theory are 1) a value function that is concave for gains, convex for losses, and steeper for losses than for gains,
13,433 citations
TL;DR: In this article, the authors show that strategies that buy stocks that have performed well in the past and sell stocks that had performed poorly in past years generate significant positive returns over 3- to 12-month holding periods.
Abstract: This paper documents that strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3- to 12-month holding periods. We find that the profitability of these strategies are not due to their systematic risk or to delayed stock price reactions to common factors. However, part of the abnormal returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented
10,806 citations