behavioural finance

Topics: Active management, Risk, Decision making Pages: 2 (296 words) Published: October 13, 2014
Behavioural Finance
Petere Dybdahl Hede
Behavioural finance is an add-on paradigm of finance, which seeks to supplement the standard theories of finance by introducing behavioural aspects to the decision-making process.

Behavioural finance deals with individuals and ways of gathering and using information.

Martin Sewell
Behavioural finance is the study of the influence of psychology on the behavioural of financial practitioners and subsequent effect on markets.

Anastasios Konstantinidis, Androniki Katarachia, etc
In shefrin’s (2001) terms, Behavioural Finance is ‘the study of how psychology affects financial decision making and financial markets’ and, according to Thaler (1993) it is ‘smply ‘open-mined’ finance’.

Richard Thaler, a founding father of behavioural finance, captured the conflict in a memorable National Bureau of Economic Research (NBER) conference remark to traditionalist Robert Barro: “The difference between us is that you assume people are as smart as you are, while I assume people are as dumb as I am.”

Market Hypothesis

Anastasios Konstantinidis, Androniki Katarachia, etc
According to Fama (1970), efficient markets are markets where “there are large numbers of rational profit maximisers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants.”

In efficient market, on the average, competition will cause the full effects of new information on intrinsic values to be reflected “instantaneously” in actual prices. A market in which prices always “fully reflect” all available information is called “efficient”.

The efficient market hypothesis in essence says that while an investment manager cannot systematically generate returns above the expected risk adjusted return, stocks are priced fairly in an efficient market. The theory of the impact of human behaviour on investing decision making emerged...
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