This document summarizes Richard Thaler's work on mental accounting and consumer choices. It discusses how people assign money to mental categories and spend accordingly, violating principles of fungibility. Mental accounting affects how gains and losses are perceived and integrated vs segregated. Transaction utility theory examines how reference prices and bundling influence purchase decisions. Marketers can use principles of mental accounting to influence product descriptions and pricing strategies. Overall, mental accounting helps explain seemingly irrational financial behaviors.
This document summarizes key concepts in behavioral finance, which models how psychological factors influence investor behavior. It discusses two categories of irrationalities: errors in information processing and behavioral biases. Specific errors discussed include forecast errors due to overreacting to recent data, overconfidence, conservatism in updating beliefs, and neglecting sample size. Biases discussed include reference dependence, regret avoidance, house money effect, and mental accounting.
Behavioral finance is an emerging field that combines psychology and financial decision making. It argues that markets are not always efficient in the short run and that people do not always make rational decisions. Behavioral finance provides insights into how emotions like greed and fear can influence investor behavior and make markets volatile. It aims to help investors make sane and safe decisions by restraining emotions and understanding crowd behavior and market sentiments.
Abstract
The idea of an Efficient Market first came from the French mathematician Louis Bachelier in 1900: « The theory of speculation ».
Bachelier argued that there is no useful information in past stock prices that can help predicting future prices and proposed a theory for financial options’ valuation based on Fourier’s law and Brownian’s motions (time series).
Bachelier’s work get popular in the 60s during the computer’s era.
In 1965, Eugene Fama published a dissertation arguing for the random walk hypothesis (Stock market’s prices evolve randomly: prices cannot be predicted using past data).
In 1970, Fama published a review of the theory and empirical evidences
The EMH (Efficient Market Hypothesis): Financial markets are efficient at processing information. Consequently, the prices of securities is a correct representation of all information available at any time.
Weak:
Not possible to earn superior profits (risk adjusted) based on the knowledge of past prices and returns.
Semi-strong:
Not possible to earn superior profits using all information publicly available.
Strong:
Not possible to earn superior profit using all publicly and inside information.
The CAPM describes the relationship between market risks and expected return for a security i (also called cost of equity), E(Re_i):
Re_i = Rf – Bi(Rm – Rf)
With:
Rf = Risk free rate (typically government bond rate)
Rm = Expected return for the whole market
Bi = The volatility risk of the security i compared to the whole market
(Rm – Rf) is consequently the market risk premium
According to the EMH, for a well-diversified portfolio, expected returns can only reflect those of the market as a whole. Consequently, in the CAPM formula, It would involves that for a diversified-enough portfolio: β = 1 so Re = Rm
Investors want to value companies before making investment decisions.
A typical way to do so is to use the Discounted Cash Flow (DCF) method:
See also: Prospect theory, disposition effect, heuristic, framing, mental accounting, Home bias, representativeness, conservatism, availability, greater fool theory, self attribution theory, anchoring, ambiguity aversion, winner's curse, managerial miscalibration and misconception, Equity premium puzzle, market anomalies, excess volatility, Bubbles, herding, limited liabilities, Fama French three 3 factors model.
1) The document discusses behavioral finance concepts including the efficient market hypothesis and limits to rational decision making.
2) Key behavioral concepts explored are prospect theory, heuristics, and cognitive biases that can influence financial decisions.
3) Limits to arbitrage like noise trader risk and short-selling constraints may allow irrational prices to persist temporarily despite arbitrage.
The document discusses the disposition effect, which is the tendency of investors to sell winners too early and hold on to losers too long. This effect can be explained by prospect theory, mental accounting, regret aversion, and self-control issues. An empirical study analyzed individual investor trades between 1964-1970 and found that around 40% of realized trades were losses, contradicting the prediction of tax-motivated trading alone. Both disposition effects and tax considerations together can explain the patterns observed.
Behavioral finance attempts to explain financial decision-making by considering how psychology impacts judgment and behavior. It bridges finance and psychology by recognizing individuals may make irrational decisions due to mental errors and emotional biases. Behavioral finance is significant because it helps define investors' biases and manage them, improving investment decisions and advising. It incorporates psychological concepts like prospect theory, loss aversion, and mental accounting to better understand investor behavior.
This document summarizes Richard Thaler's work on mental accounting and consumer choices. It discusses how people assign money to mental categories and spend accordingly, violating principles of fungibility. Mental accounting affects how gains and losses are perceived and integrated vs segregated. Transaction utility theory examines how reference prices and bundling influence purchase decisions. Marketers can use principles of mental accounting to influence product descriptions and pricing strategies. Overall, mental accounting helps explain seemingly irrational financial behaviors.
This document summarizes key concepts in behavioral finance, which models how psychological factors influence investor behavior. It discusses two categories of irrationalities: errors in information processing and behavioral biases. Specific errors discussed include forecast errors due to overreacting to recent data, overconfidence, conservatism in updating beliefs, and neglecting sample size. Biases discussed include reference dependence, regret avoidance, house money effect, and mental accounting.
Behavioral finance is an emerging field that combines psychology and financial decision making. It argues that markets are not always efficient in the short run and that people do not always make rational decisions. Behavioral finance provides insights into how emotions like greed and fear can influence investor behavior and make markets volatile. It aims to help investors make sane and safe decisions by restraining emotions and understanding crowd behavior and market sentiments.
Abstract
The idea of an Efficient Market first came from the French mathematician Louis Bachelier in 1900: « The theory of speculation ».
Bachelier argued that there is no useful information in past stock prices that can help predicting future prices and proposed a theory for financial options’ valuation based on Fourier’s law and Brownian’s motions (time series).
Bachelier’s work get popular in the 60s during the computer’s era.
In 1965, Eugene Fama published a dissertation arguing for the random walk hypothesis (Stock market’s prices evolve randomly: prices cannot be predicted using past data).
In 1970, Fama published a review of the theory and empirical evidences
The EMH (Efficient Market Hypothesis): Financial markets are efficient at processing information. Consequently, the prices of securities is a correct representation of all information available at any time.
Weak:
Not possible to earn superior profits (risk adjusted) based on the knowledge of past prices and returns.
Semi-strong:
Not possible to earn superior profits using all information publicly available.
Strong:
Not possible to earn superior profit using all publicly and inside information.
The CAPM describes the relationship between market risks and expected return for a security i (also called cost of equity), E(Re_i):
Re_i = Rf – Bi(Rm – Rf)
With:
Rf = Risk free rate (typically government bond rate)
Rm = Expected return for the whole market
Bi = The volatility risk of the security i compared to the whole market
(Rm – Rf) is consequently the market risk premium
According to the EMH, for a well-diversified portfolio, expected returns can only reflect those of the market as a whole. Consequently, in the CAPM formula, It would involves that for a diversified-enough portfolio: β = 1 so Re = Rm
Investors want to value companies before making investment decisions.
A typical way to do so is to use the Discounted Cash Flow (DCF) method:
See also: Prospect theory, disposition effect, heuristic, framing, mental accounting, Home bias, representativeness, conservatism, availability, greater fool theory, self attribution theory, anchoring, ambiguity aversion, winner's curse, managerial miscalibration and misconception, Equity premium puzzle, market anomalies, excess volatility, Bubbles, herding, limited liabilities, Fama French three 3 factors model.
1) The document discusses behavioral finance concepts including the efficient market hypothesis and limits to rational decision making.
2) Key behavioral concepts explored are prospect theory, heuristics, and cognitive biases that can influence financial decisions.
3) Limits to arbitrage like noise trader risk and short-selling constraints may allow irrational prices to persist temporarily despite arbitrage.
The document discusses the disposition effect, which is the tendency of investors to sell winners too early and hold on to losers too long. This effect can be explained by prospect theory, mental accounting, regret aversion, and self-control issues. An empirical study analyzed individual investor trades between 1964-1970 and found that around 40% of realized trades were losses, contradicting the prediction of tax-motivated trading alone. Both disposition effects and tax considerations together can explain the patterns observed.
Behavioral finance attempts to explain financial decision-making by considering how psychology impacts judgment and behavior. It bridges finance and psychology by recognizing individuals may make irrational decisions due to mental errors and emotional biases. Behavioral finance is significant because it helps define investors' biases and manage them, improving investment decisions and advising. It incorporates psychological concepts like prospect theory, loss aversion, and mental accounting to better understand investor behavior.
The document outlines behavioral finance concepts and how they relate to standard financial theory. It discusses how behavioral finance provides an overlay to traditional models by recognizing that investors are not perfectly rational and there are cognitive biases. It then surveys various behavioral characteristics like loss aversion, narrow framing, anchoring, and herd behavior that can influence investor decisions in systematic ways. The document emphasizes developing a long-term investment strategy and working with advisors to overcome cognitive biases.
Behavioral finance is the study of how psychology influences financial decision making. It argues that emotions and mental errors cause asset mispricing, rather than rational factors alone. Traditional finance assumes rational investors, while behavioral finance recognizes that investors exhibit heuristics, frame dependence, and emotional inefficiencies. Examples include prospect theory, mental accounting, and the disposition effect. Behavioral finance provides a more realistic and explanatory view of actual investor behavior compared to traditional finance assumptions.
Rationality and non traditional preferencesSimran Kaur
This document summarizes Daniel Ellsberg's paradoxes of decision making under ambiguity and uncertainty. It discusses rationality from different perspectives and how bounded rationality affects decisions. Behavioral biases like belief bias, conservatism bias, and confirmation bias can influence investors' judgments. Prospect theory and loss aversion are discussed as examples of non-traditional preferences. Bubbles, their causes, and types are outlined. Factors influencing investors' sentiments are also summarized.
Understanding how the mind can help or hinder investment successRavi Abeysuriya
This document provides an overview of behavioral finance and how psychological biases can influence investment decisions. Some key points:
- Behavioral finance studies how emotions and psychological biases can cause investors to make irrational financial decisions. Understanding these biases can help advisers improve their recommendations and clients' investment outcomes.
- Traditional finance assumes investors are rational, while behavioral finance recognizes that normal human investors are not perfectly rational and can be swayed by emotions and cognitive biases.
- Common biases that can negatively impact investing include overconfidence, herd mentality, loss aversion, anchoring, and narrow framing.
- By understanding these biases, advisers can help clients avoid common pitfalls and make more informed financial decisions. Techniques like
This is a Behavioral Finance Lesson material which delivered by me for PhD students of Faculty of Business Administration in Karvina, Silesian University.
This document provides an overview of behavioural corporate finance. It discusses how behavioural corporate finance studies the decisions made by company managers and owners that affect company value, examining how psychological biases influence corporate finance decisions. Some key biases discussed include narrow framing, confirmation bias, and overconfidence. The document also summarizes assumptions of behavioural corporate finance, and discusses topics like corporate dividend policy, empirical data on dividend presence and absence, ex-dividend day behavior, announcing good and bad news, using behavioral factors systematically, neurophysiology of risk taking, and linking personality traits to risk attitudes.
Behavioral finance, heuristics and marketing A.W. Berry
Economic and financial heuristics explain how people's money related decision making is influenced by psychology and sociological trends. This is relevant in the marketing profession and to corporate strategists because purchase decisions, stock market investing and other financial decision making is linked to consumer behavior.
Investors do not always behave rationally as assumed by traditional finance theories. Behavioral finance incorporates insights from psychology to understand how investor behavior actually departs from rational decision making. Some key insights from behavioral finance include that investors exhibit cognitive biases like overconfidence and framing effects. They are also influenced by emotions. While traditional theories assume markets are efficient, behavioral finance suggests market inefficiencies can persist due to limits to arbitrage from factors like information and trading costs. Understanding actual investor psychology is important for behavioral finance in explaining anomalies compared to models of rational decision making.
Behavioral finance integrates psychology into traditional finance to explain why people make irrational financial decisions. It studies concepts like representativeness heuristic, loss aversion, fear of regret, herding, anchoring, illusion of control, and prospect theory. Behavioral finance recognizes that investors do not always act rationally as assumed by conventional finance. It provides insights into common cognitive biases and established behaviors that influence investment decisions.
This document summarizes key chapters and concepts from the book "Trading Risk" by Kenneth L. Grant. It focuses on chapters about setting performance objectives, understanding profit/loss patterns over time, assessing risk at the portfolio and individual trade level. The summary emphasizes evaluating trade performance metrics, identifying strengths in different trade types, and monetizing average holding periods to efficiently turnover trades for consistent profits. The overall goal discussed is effectively managing risk at the portfolio and individual trade level for performance management of a trading account.
This document discusses several theories related to decision making under risk and uncertainty:
- Expected utility theory proposes that individuals make rational decisions by assigning probabilities to outcomes.
- Prospect theory, developed by Kahneman and Tversky, suggests that individuals frame decisions in terms of potential gains or losses rather than final outcomes. Losses loom larger than equivalent gains.
- The disposition effect refers to the tendency of investors to sell winning stocks and hold on to losing stocks.
- Heuristics are mental shortcuts used to make quick decisions with limited time, information, or other constraints. Common heuristics include familiarity, ambiguity aversion, and diversification.
Behavioral finance proposes that psychology affects investment decisions. The field began in 1979 with prospect theory, which found that people value gains and losses differently and losses have a greater emotional impact. Endowment bias describes valuing something you own more than something you don't. Studies show people value owned items more than similar unowned items. This bias causes investors to hold onto inherited or purchased securities due to fears of loss, decision paralysis, wanting to avoid transaction costs, and preference for familiar investments, even if they are performing poorly.
This paper examines professional investors can apply the principles within and around Behavioural Finance to maximise investment skill and minimise any negative impact of behavioural bias.
Mental accounting refers to how people separate and evaluate their money mentally based on subjective factors like the source of funds, intended use, and whether gains or losses are being realized. People do not always treat money as fungible or interchangeable due to mental accounting biases. For example, people are more willing to spend windfall gains like bonuses on unnecessary purchases rather than important expenses. They also take more risks with investment accounts than savings earmarked for emergencies. To avoid suboptimal financial decisions due to mental accounting biases, people should treat all funds interchangeably, have a coherent investment strategy, and avoid overspending leftover budgets.
This document discusses how behavioral economics can help reduce insurance fraud through promoting honesty. It describes how insurance claim exaggeration is prevalent and costly. An experiment showed that having participants agree to an honesty pledge significantly reduced dishonest claims for a maximum bonus compared to a control group, demonstrating contextual factors can influence honesty. The results suggest applying psychological insights like honesty pledges could help design insurance processes to reduce fraud.
Using Behavioural Economics To Create Value In GamblingAndrew Gregoris
1) The document discusses key concepts from behavioral economics and how they relate to gambling services. It explains that people are more sensitive to losses than gains and tend to stick with familiar options. 2) Messengers, incentives, norms, defaults, and salience all influence decision making in predictable ways. Changing defaults or using social norms are examples of "nudges" that can affect behavior. 3) Understanding cognitive biases and emotional factors is important for designing services that influence choices around gambling.
Term Paper_Contemporary Banking_The primacy of Asset Liability Management Str...Amit Mittal
This document discusses asset liability management (ALM) strategies in banks, particularly in India and China. It summarizes various academic literature on ALM strategies and their impact. ALM involves managing the maturity mismatch between a bank's assets and liabilities to minimize risks from interest rate changes. While ALM is crucial for banks, debt markets in India are less liquid than in other countries, constraining banks' ability to trade debt and implement optimal ALM strategies. The document argues for developing more liquid debt markets in India to help banks better manage risks from maturity transformation.
Asset liability management-in_the_indian_banks_issues_and_implicationsVikas Patro
This document discusses asset-liability management (ALM) in Indian banks. It provides background on the evolution of risk management practices in Indian banks over time in response to deregulation and other changes. It describes various types of risks banks face, such as interest rate risk, liquidity risk, and credit risk. Effective ALM is important for banks to manage these risks and balance risks with profits. The document outlines objectives to study the current status and impact of ALM practices in Indian banks.
Behavioural Economics Workshop, OECD, Paris - 31 March 2014 - Pete LunnOECD Governance
Presentation by Pete Lunn, ESRI, at the Behavioural Economics Workshop, OECD, Paris - 31 March 2014. More information at www.oecd.org/gov/behavioural-economics.htm
This document discusses various risks faced by banks, including CAMEL risks relating to capital adequacy, asset quality, management, earnings, and liquidity. It also discusses asset liability management (ALM), which involves planning, organizing, and controlling a bank's assets and liabilities to maintain liquidity and net interest income. Other topics covered include liquidity management, types of liquidity risk, interest rate risk management, and sources of interest rate risk.
Presentation given on TechnicalAnalyst.com event "Machine learning techniques in finance" on 17th November 2016.
- What is machine learning and how it can help predict finnacial markets
- Technical stock analysis vs. behavioural news and social media analysis
- How machine learning can be applied to technical analysis in the stock market
- How machine learning can be applied to new/social media analysis
This document discusses various types of investors and behavioral finance theories. It describes savers, speculators, bull investors, bear investors, and specialists. It then explains prospect theory, regret theory, anchoring, and over-and-under reaction. Prospect theory shows how people assess risk differently based on potential gains or losses. Regret theory discusses avoiding regret when investments decline. Anchoring refers to relying on recent prices. Over-and-under reaction means overestimating success and underestimating risks. The document provides examples for each theory.
The document outlines behavioral finance concepts and how they relate to standard financial theory. It discusses how behavioral finance provides an overlay to traditional models by recognizing that investors are not perfectly rational and there are cognitive biases. It then surveys various behavioral characteristics like loss aversion, narrow framing, anchoring, and herd behavior that can influence investor decisions in systematic ways. The document emphasizes developing a long-term investment strategy and working with advisors to overcome cognitive biases.
Behavioral finance is the study of how psychology influences financial decision making. It argues that emotions and mental errors cause asset mispricing, rather than rational factors alone. Traditional finance assumes rational investors, while behavioral finance recognizes that investors exhibit heuristics, frame dependence, and emotional inefficiencies. Examples include prospect theory, mental accounting, and the disposition effect. Behavioral finance provides a more realistic and explanatory view of actual investor behavior compared to traditional finance assumptions.
Rationality and non traditional preferencesSimran Kaur
This document summarizes Daniel Ellsberg's paradoxes of decision making under ambiguity and uncertainty. It discusses rationality from different perspectives and how bounded rationality affects decisions. Behavioral biases like belief bias, conservatism bias, and confirmation bias can influence investors' judgments. Prospect theory and loss aversion are discussed as examples of non-traditional preferences. Bubbles, their causes, and types are outlined. Factors influencing investors' sentiments are also summarized.
Understanding how the mind can help or hinder investment successRavi Abeysuriya
This document provides an overview of behavioral finance and how psychological biases can influence investment decisions. Some key points:
- Behavioral finance studies how emotions and psychological biases can cause investors to make irrational financial decisions. Understanding these biases can help advisers improve their recommendations and clients' investment outcomes.
- Traditional finance assumes investors are rational, while behavioral finance recognizes that normal human investors are not perfectly rational and can be swayed by emotions and cognitive biases.
- Common biases that can negatively impact investing include overconfidence, herd mentality, loss aversion, anchoring, and narrow framing.
- By understanding these biases, advisers can help clients avoid common pitfalls and make more informed financial decisions. Techniques like
This is a Behavioral Finance Lesson material which delivered by me for PhD students of Faculty of Business Administration in Karvina, Silesian University.
This document provides an overview of behavioural corporate finance. It discusses how behavioural corporate finance studies the decisions made by company managers and owners that affect company value, examining how psychological biases influence corporate finance decisions. Some key biases discussed include narrow framing, confirmation bias, and overconfidence. The document also summarizes assumptions of behavioural corporate finance, and discusses topics like corporate dividend policy, empirical data on dividend presence and absence, ex-dividend day behavior, announcing good and bad news, using behavioral factors systematically, neurophysiology of risk taking, and linking personality traits to risk attitudes.
Behavioral finance, heuristics and marketing A.W. Berry
Economic and financial heuristics explain how people's money related decision making is influenced by psychology and sociological trends. This is relevant in the marketing profession and to corporate strategists because purchase decisions, stock market investing and other financial decision making is linked to consumer behavior.
Investors do not always behave rationally as assumed by traditional finance theories. Behavioral finance incorporates insights from psychology to understand how investor behavior actually departs from rational decision making. Some key insights from behavioral finance include that investors exhibit cognitive biases like overconfidence and framing effects. They are also influenced by emotions. While traditional theories assume markets are efficient, behavioral finance suggests market inefficiencies can persist due to limits to arbitrage from factors like information and trading costs. Understanding actual investor psychology is important for behavioral finance in explaining anomalies compared to models of rational decision making.
Behavioral finance integrates psychology into traditional finance to explain why people make irrational financial decisions. It studies concepts like representativeness heuristic, loss aversion, fear of regret, herding, anchoring, illusion of control, and prospect theory. Behavioral finance recognizes that investors do not always act rationally as assumed by conventional finance. It provides insights into common cognitive biases and established behaviors that influence investment decisions.
This document summarizes key chapters and concepts from the book "Trading Risk" by Kenneth L. Grant. It focuses on chapters about setting performance objectives, understanding profit/loss patterns over time, assessing risk at the portfolio and individual trade level. The summary emphasizes evaluating trade performance metrics, identifying strengths in different trade types, and monetizing average holding periods to efficiently turnover trades for consistent profits. The overall goal discussed is effectively managing risk at the portfolio and individual trade level for performance management of a trading account.
This document discusses several theories related to decision making under risk and uncertainty:
- Expected utility theory proposes that individuals make rational decisions by assigning probabilities to outcomes.
- Prospect theory, developed by Kahneman and Tversky, suggests that individuals frame decisions in terms of potential gains or losses rather than final outcomes. Losses loom larger than equivalent gains.
- The disposition effect refers to the tendency of investors to sell winning stocks and hold on to losing stocks.
- Heuristics are mental shortcuts used to make quick decisions with limited time, information, or other constraints. Common heuristics include familiarity, ambiguity aversion, and diversification.
Behavioral finance proposes that psychology affects investment decisions. The field began in 1979 with prospect theory, which found that people value gains and losses differently and losses have a greater emotional impact. Endowment bias describes valuing something you own more than something you don't. Studies show people value owned items more than similar unowned items. This bias causes investors to hold onto inherited or purchased securities due to fears of loss, decision paralysis, wanting to avoid transaction costs, and preference for familiar investments, even if they are performing poorly.
This paper examines professional investors can apply the principles within and around Behavioural Finance to maximise investment skill and minimise any negative impact of behavioural bias.
Mental accounting refers to how people separate and evaluate their money mentally based on subjective factors like the source of funds, intended use, and whether gains or losses are being realized. People do not always treat money as fungible or interchangeable due to mental accounting biases. For example, people are more willing to spend windfall gains like bonuses on unnecessary purchases rather than important expenses. They also take more risks with investment accounts than savings earmarked for emergencies. To avoid suboptimal financial decisions due to mental accounting biases, people should treat all funds interchangeably, have a coherent investment strategy, and avoid overspending leftover budgets.
This document discusses how behavioral economics can help reduce insurance fraud through promoting honesty. It describes how insurance claim exaggeration is prevalent and costly. An experiment showed that having participants agree to an honesty pledge significantly reduced dishonest claims for a maximum bonus compared to a control group, demonstrating contextual factors can influence honesty. The results suggest applying psychological insights like honesty pledges could help design insurance processes to reduce fraud.
Using Behavioural Economics To Create Value In GamblingAndrew Gregoris
1) The document discusses key concepts from behavioral economics and how they relate to gambling services. It explains that people are more sensitive to losses than gains and tend to stick with familiar options. 2) Messengers, incentives, norms, defaults, and salience all influence decision making in predictable ways. Changing defaults or using social norms are examples of "nudges" that can affect behavior. 3) Understanding cognitive biases and emotional factors is important for designing services that influence choices around gambling.
Term Paper_Contemporary Banking_The primacy of Asset Liability Management Str...Amit Mittal
This document discusses asset liability management (ALM) strategies in banks, particularly in India and China. It summarizes various academic literature on ALM strategies and their impact. ALM involves managing the maturity mismatch between a bank's assets and liabilities to minimize risks from interest rate changes. While ALM is crucial for banks, debt markets in India are less liquid than in other countries, constraining banks' ability to trade debt and implement optimal ALM strategies. The document argues for developing more liquid debt markets in India to help banks better manage risks from maturity transformation.
Asset liability management-in_the_indian_banks_issues_and_implicationsVikas Patro
This document discusses asset-liability management (ALM) in Indian banks. It provides background on the evolution of risk management practices in Indian banks over time in response to deregulation and other changes. It describes various types of risks banks face, such as interest rate risk, liquidity risk, and credit risk. Effective ALM is important for banks to manage these risks and balance risks with profits. The document outlines objectives to study the current status and impact of ALM practices in Indian banks.
Behavioural Economics Workshop, OECD, Paris - 31 March 2014 - Pete LunnOECD Governance
Presentation by Pete Lunn, ESRI, at the Behavioural Economics Workshop, OECD, Paris - 31 March 2014. More information at www.oecd.org/gov/behavioural-economics.htm
This document discusses various risks faced by banks, including CAMEL risks relating to capital adequacy, asset quality, management, earnings, and liquidity. It also discusses asset liability management (ALM), which involves planning, organizing, and controlling a bank's assets and liabilities to maintain liquidity and net interest income. Other topics covered include liquidity management, types of liquidity risk, interest rate risk management, and sources of interest rate risk.
Presentation given on TechnicalAnalyst.com event "Machine learning techniques in finance" on 17th November 2016.
- What is machine learning and how it can help predict finnacial markets
- Technical stock analysis vs. behavioural news and social media analysis
- How machine learning can be applied to technical analysis in the stock market
- How machine learning can be applied to new/social media analysis
This document discusses various types of investors and behavioral finance theories. It describes savers, speculators, bull investors, bear investors, and specialists. It then explains prospect theory, regret theory, anchoring, and over-and-under reaction. Prospect theory shows how people assess risk differently based on potential gains or losses. Regret theory discusses avoiding regret when investments decline. Anchoring refers to relying on recent prices. Over-and-under reaction means overestimating success and underestimating risks. The document provides examples for each theory.
This document discusses segmentation strategies for creating profitable customers. It begins by renewing the understanding of why segmentation is important for driving higher profitability through understanding customer needs. It then discusses profiting through segmentation by understanding customers and developing targeting strategies. It emphasizes investing in tools, skills, and systems to operationalize segmentation. Finally, it stresses the importance of demonstrating segmentation strategies through testing, measurement, and gaining organizational buy-in to make segmentation efforts successful.
This document lists potential project topics in the areas of manufacturing companies, banks, stock broking and financial services. For manufacturing companies, topics include comparative analysis, cash management and capital budgeting. For banks, topics cover loans, accounts, mutual funds and asset liability management. Stock broking and financial services topics range from derivatives and IPOs to commodity trading, dematerialization of shares and foreign exchange. The document also provides a short list of current focused topics including metro rail, banking, microfinance and financial inequalities.
Behavioural economics studies how psychological, social, cognitive, and emotional factors influence economic decisions. As humans, our "primitive" brain can lead to irrational behaviors that favor instant gratification over long-term gain. Understanding these human biases is important for decision-making that achieves long-term sustainability. Some key biases discussed include anchoring bias, loss aversion, bandwagon effect, and instant gratification bias. Overcoming biases requires acting counter-intuitively and recognizing how biases can negatively impact organizations, economies, and the environment.
The document discusses business environmental analysis and its importance for strategic decision making. It defines business environment and explains that businesses operate in a unique environment and cannot function in isolation. The business environment includes internal factors that are controllable by the business as well as external factors from the macro and micro environment that are beyond the business's control. Conducting an analysis of the business environment is important for identifying opportunities and threats to help guide the business's growth strategy.
Behavioral finance proposes that psychology influences investment decisions and market outcomes. Unlike standard finance theory which assumes rational investors, behavioral finance recognizes that investors are not always rational and make decisions based on imperfect information. Some key concepts in behavioral finance include loss aversion, anchoring, herding behavior, and overconfidence. Behavioral biases like narrow framing and regret avoidance can also impact decisions. While arbitrage should eliminate irrational behavior, limits to arbitrage like fundamental risk and implementation costs allow anomalies to persist. Technical analysis uses patterns in stock prices based on the idea that prices adjust gradually to new information.
Behavioral finance proposes that psychology influences investment decisions and market outcomes. Unlike standard finance theory which assumes rational investors, behavioral finance recognizes that investors are not always rational and make decisions based on imperfect information. Some key concepts in behavioral finance include loss aversion, anchoring, herding behavior, and overconfidence. Behavioral biases like narrow framing and regret avoidance can also impact decisions. While arbitrage should eliminate irrational behavior, limits to arbitrage like fundamental risk and implementation costs allow anomalies to persist. Technical analysis uses patterns in stock prices based on the idea that prices adjust gradually to new information.
This document provides an introduction and overview of a paper that examines different trading styles and who wins and loses from trading. It discusses trading as a zero-sum game where one trader's profits come from another trader's losses. It identifies three main groups of traders: winning traders who trade profitably, utilitarian traders who trade because external benefits exceed losses, and futile traders who expect profits but do not achieve them. The document outlines the paper's goals of analyzing different trading styles, understanding how they generate profits or losses, and examining implications for price efficiency and liquidity. It also discusses challenges in predicting future performance based on past results.
The document discusses how investor psychology and behavioral biases influence trends, consolidations, and reversals in the market. It explains that markets are driven by expectations, which arise from beliefs, biases, emotions like fear and greed. During trends, positive feedback loops cause prices to self-promote in a direction due to bias. Consolidations involve varying emotions as fear and hope as the trend interrupts. At tops and bottoms, cognitive dissonance causes investors to ignore contrary evidence or double down due to bias. Understanding these behavioral elements can provide insight into how and why markets move.
This document provides an overview of trading, including different types of trading strategies, risk management techniques, the psychology of trading, and common mistakes. It covers day trading, swing trading, position trading, technical analysis, fundamental analysis, quantitative analysis, assessing risk, controlling emotions, goal setting, developing the right mindset, avoiding distractions, and overtrading, chasing losses, and falling for hype. The conclusion recommends assessing risk, sticking to a plan, and using available resources to continue learning about trading.
Stock Market Psychology Keys to Successful Investment.pptxjohnsmith0325420
Understanding Stock Market Psychology is like having a secret key to successful investing. It's about knowing how people's feelings, like fear and greed, can affect the stock market. This knowledge helps you make smart decisions, like when to buy or sell stocks. It's like having a map to navigate the emotional ups and downs of investing. So, if you want to succeed in the stock market, grab hold of the keys to Stock Market Psychology – your guide to making money wisely
This is a presentation by Investor Buying Behavior Consultant Mawunyo Adjei pointing out emotionally driven financial decisions of Investors. It also includes ideas on how to control emotional investing.
You can no longer count on a return to “ Normal” competitive conditions. The business world is flat, with capital & knowledge able to move anywhere instantly. Brands are losing value, regulations are increasing and competitors can come out anywhere. Filtered information, Selective hearing, Wishful thinking, Fear and Emotional over investment can all act to prevent an organization from Confronting and dealing with reality.
As a way to understand reality, the authors put a high premium on business savvy- the ability to understand the fundamentals of a business, and the connections between them. The book presents a model and process to help leaders learn business savvy to recognize the position of their business in wider external realities and to take action based on that understanding.
Title: The Psychology of Forex Trading: Mastering Emotions for Success
Description:
Unlock the secrets to successful forex trading with "The Psychology of Forex Trading" ebook. Delve into the fascinating world of trading psychology and learn how to master your emotions, overcome cognitive biases, and make informed trading decisions.
This comprehensive guide explores the crucial role of psychology in forex trading, covering topics such as fear, greed, discipline, and cognitive biases. Discover practical strategies for managing emotions, maintaining discipline, and cultivating the right mindset for trading success.
With insights from experienced traders and psychology experts, this ebook provides valuable lessons and actionable advice to help traders of all levels improve their trading performance. Whether you're a beginner trader navigating the complexities of the forex market or an experienced trader looking to refine your psychological edge, this ebook is your ultimate resource for achieving success in forex trading.
Key topics covered include:
- Understanding the role of psychology in forex trading
- Managing emotions such as fear, greed, and anxiety
- Recognizing and overcoming cognitive biases
- Developing discipline and consistency in trading
- Building confidence and overcoming self-doubt
- Coping with losses and adversity
- Practicing mindfulness and emotional intelligence
Enhance your trading skills, improve your decision-making process, and achieve greater success in the forex markets with "The Psychology of Forex Trading" ebook. Get your copy today and embark on the path to trading mastery.
Keywords: Forex trading, Trading psychology, Forex psychology, Emotions in trading, Cognitive biases, Fear in trading, Greed in trading, Discipline in trading, Trading mindset, Emotional intelligence, Forex ebook, Trading strategies.
The document discusses developing a personal investment philosophy by identifying one's true purpose for money, market beliefs, and investment strategy. It explains that having a clear investment philosophy based on understanding these principles can help alleviate common investor dilemmas and provide better financial outcomes through a structured, long-term approach. Developing an investment philosophy is presented as key to achieving financial goals with peace of mind.
This document discusses behavioural finance and how it differs from traditional finance theories by accounting for human psychology and irrational decision-making. It explains key concepts of behavioural finance like cognitive biases, loss aversion, and prospect theory. Specific biases discussed include confirmation bias, experiential bias, loss aversion, overconfidence, disposition bias, familiarity bias, and mental accounting. The document also provides an executive summary of a behavioural finance paper that outlines how biases can impact investment decisions.
This document summarizes Steve Burns' book "Trading Habits: 39 of the World's Most Powerful Stock Market Rules". It discusses developing good trading habits through establishing rules and practicing discipline. Specific rules covered include having a trading system with a high win rate or large wins/small losses, basing trades on quantifiable signals rather than opinions, and using proper position sizing. The goal is to cut losses short but let winners run in order to be profitable even with a lower win rate.
Representativeness bias refers to judging the probability of an event based on similarity to familiar prototypes rather than objective statistics. This can lead investors to ignore base rates and sample sizes when making decisions. For example, investors may overweight recent stock performance or the views of a broker based on a small number of picks. To overcome this bias, investors should be aware of it, consider base rates and full sample sizes through Bayesian thinking, and rely more on analytical thinking than subjective assessments. Representativeness bias can cause poor financial decisions if objective data is ignored.
- Wealthy investors have become highly pessimistic about the economy and stock market due to ongoing volatility and downturns. Many investors are losing patience and making irrational changes to their portfolios without consulting their advisors.
- Goals-based investing focuses on aligning investment strategies with clients' specific financial goals rather than short-term performance. This approach can help address investors' behavioral biases and irrational decisions by keeping them focused on their long-term goals.
- Advisors can use goals-based investing to differentiate themselves, deepen relationships with clients, and better manage client expectations and behavior during periods of market uncertainty.
The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models.
Prepublication version of paper: https://ssrn.com/abstract=265132.
1) The document discusses developing a comprehensive financial strategy that combines different investment ideas, practices, and notions into a coordinated plan.
2) It emphasizes regularly reviewing and adjusting the strategy based on economic changes to ensure the strategy's actions and goals remain aligned.
3) The author proposes a "Financial Select" approach that incorporates monthly coaching, regular strategy adjustments, and considering both long-term and short-term factors to develop a holistic financial strategy.
Small cap stocks are riskier than other investments because there is more market volatility. AAA Penny Stocks can help you make a smart decision. Small Cap Stocks are a good choice but only for those who understand and know about the ins and outs of stock market and working across companies with limited and small market capitalization.
We have seen many individuals who always remain enthusiastic in learning about small cap stocks and their benefits. It is not a difficult to learn and understand about these stocks. In fact, anyone with a primary level understanding about stock market and share trading can easily get this concept. It all revolves around corporations who operate in the market with minimum or a lesser capitalization. A lesser market capitalization means limited and a small number of equity holders or in more common terms lesser shareholders. Thus, a shareholder with having shares of such a corporation can anticipate more gains. However, this subject is not as simple as it sounds. No one can give you a guarantee about the performance when it comes about investment instruments and especially about stocks. goo.gl/rq6xYH
Similar to Behavioural psychology and your trading (20)
“Amidst Tempered Optimism” Main economic trends in May 2024 based on the results of the New Monthly Enterprises Survey, #NRES
On 12 June 2024 the Institute for Economic Research and Policy Consulting (IER) held an online event “Economic Trends from a Business Perspective (May 2024)”.
During the event, the results of the 25-th monthly survey of business executives “Ukrainian Business during the war”, which was conducted in May 2024, were presented.
The field stage of the 25-th wave lasted from May 20 to May 31, 2024. In May, 532 companies were surveyed.
The enterprise managers compared the work results in May 2024 with April, assessed the indicators at the time of the survey (May 2024), and gave forecasts for the next two, three, or six months, depending on the question. In certain issues (where indicated), the work results were compared with the pre-war period (before February 24, 2022).
✅ More survey results in the presentation.
✅ Video presentation: https://youtu.be/4ZvsSKd1MzE
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2. About MahiFX
MahiFX is an online retail trading platform offering clients
exceptionally competitive spreads and great customisable
charting functionality.
Simon Coulter, is the Head of Development and Risk
Management at MahiFX and will be discussing the key
areas of human behaviour which can have major
implications on your trading decisions. In the webinar, he
will discuss some practical examples of how to recognise
and address these issues.
3. Key Discussion Areas Of The
Webinar
• What is Behavioural Finance and why is it important to
my trading/investing?
• Discussion on the Efficient Market
Hypothesis/Behavioural Finance relationship
• Key areas of Behavioural Finance
• Examining how knowledge of these (above) can
increase our awareness of why the markets behave how
they do, and help us adapt our trading/investing
4. What Is Behavioural Finance?
Behavioural Finance is the study of the effects that social,
cognitive and emotional factors have on economic
decisions and consequences those decisions may have on
market pricing, returns and resource allocation
Behavioural Finance and Market Efficiency
Does Behavioural Finance research cast doubt over prior
assumptions on market efficiency?
5. Key Behavioural Heuristics And Biases
Anchoring
Cognitive bias which sees people rely too heavily on initial
pieces of information when making decisions causing
subsequent judgements to be anchored to the information
Examples include:
1. Current prices used as anchor in determining current
fair values
2. Investment bank analysts and economist forecasts are
often anchored around previous numbers and around
other analyst consensus forecasts
3. Starting points of negotiations influence the negotiated
outcome
4. Support and resistance levels can be traced to
anchoring
6. How Does Anchoring Effect Our
Trading Decisions?
Anchoring can have a severe impact on our ability to give
an objective probability on the likely outcome of a trade or
investment leading to poor decisions about the risk inherent
in trades/investments
Conservativeness
The tendency for people to cling to a view, closely linked to
anchoring, it can be caused by overconfidence. Main result
of this is the under-reaction to new information
7. Some Key Concepts
Confirmation bias
Tendency to seek information, which conforms to our view,
ignoring contradictory information
Illusion of validity
Tendency for people to think their views are more valid than
they actually are
Cognitive dissonance
Mental conflict caused when faced with contradictory
evidence, tends to see us seek conforming evidence
Alternative histories
Observed outcome was just one of a number of possible
outcomes given the complex participant decision making
process at play
8. Conservativeness And Points To
Consider With Our Trading
1. Be especially mindful of confirmation bias when back
testing trading rules, address the problems that curve
fitting presents
2. Seek out alternative viewpoints and information that run
counter to yours
3. Avoid scanning the world of technical indicators to find
ones that back up your view, sticking to a smaller
sphere may be helpful in this regard
4. Try to increase your understanding of markets and the
context within which events are developing
5. Seek out the opinion of the majority it likely provides
valuable information on what not to do, and how not to
be positioned
9. Representativeness
Bias which causes us to estimate the likelihood of
something happening being based on how closely it
resembles something else. It causes people to place too
much weight on recent data. The heuristic helps us see
patterns in data and saves on computation
Illusory Correlation
Term that refers to our propensity to see patterns and
correlation in random/uncorrelated events
10. Representativeness And Our
Trading
1. Relying too heavily on recent data can cause us to
extrapolate recent movements
2. Will assume future patterns will resemble past ones
without having sufficient regard to context
3. Can cause traders/investors to over-react to repeated
bouts of similar news, when combined with
conservatism (which often causes under-reaction) we
can see large moves in pricing as people extrapolate
the new results and attach them to their new model
11. Price Bubbles/Busts And Positive
Feedback Trading
Extreme cases where prices continue to climb then fall as
noise traders chase the trend. Noise traders will react to
past price changes rather than any particular news per se.
Encourages extreme cases of positive feedback trading
where buying/selling encourages further reactionary
buying/selling
Trend chasing and price movements from stop loss orders
are good examples
Reflexivity
Prices influence fundamentals, new fundamentals change
expectations, further influencing prices creating a self-
reinforcing feedback loop
12. Representativeness/Feedback
Loops And Our Trading
1. Prices do not rise forever, expect mean reversion
2. Incorporate the effects of positive feedback and noise
trading into your decision process when positioning and
considering trade levels
3. Be wary of price manipulation that attempts to create
short-term feedback loops
4. Be extremely wary of crowd behaviour during price
bubbles, recognise that stringent discipline is especially
critical during these periods
13. Over-Optimism
Illusion of control
Where people feel in control of a situation far more often
than they actually are. People often fail to distinguish
between chance events and those that require skill
Self-attribution bias
The tendency for people to attribute positive outcomes to
their own skill and whilst attributing negative outcomes to
bad luck
Random reinforcement
The tendency for people to attribute random outcomes to
skill
14. Over-Optimism And Our Trading
1. Don’t trade before you have the skill and necessary
understanding to trade
2. Develop a trading plan, critically evaluate performance
against the plan, have another trader review the plan
3. Don’t confuse randomness with positive expectancy
4. Keep a detailed record of trades and evaluate that
performance against your plan. This will help address
our tendency to have a selective memory for winning
trades and reduce random reinforcement
15. Overconfidence
Closely related to over optimism. Refers to propensity for
people to believe they will be right in their forecasts far
more often then they actually are
Hindsight bias
The tendency for people after the fact to believe they had
predicted the outcome beforehand
Survivorship Bias
The tendency for failed entities (companies) to be excluded
from performance studies because they no longer are in
existence. Causes results to be skewed higher in studies,
as only those which are successful enough to survive are
included in the study
16. Overconfidence: Points To
Consider In Our Trading
1. Seek disconfirming evidence
2. Never be 100% sure about anything
3. Events in the market follow an improbable script
4. Markets normally always go against the majority to the
benefit of the minority
5. Be aware of testimonials from marketers of trade
package solutions, which prey on this bias
6. Keep a record of trades and analyse them carefully
17. Equity Curve Analysis
Tracks the performance of the system by analysing the
equity curve to ascertain periods when our system is in and
out of sync with the market
• Allows us to track multiple systems with varying degrees
of correlation allowing us to increase/decrease capital
commitment to them as they move in and out of sync
with the market
• Enables traders to have more simplistic systems that are
more flexible, less likely to be the result of having curve
fitted while testing historical expectancy and will have a
wider definition of favourable market conditions
Nonstationarity
Knowledge derived from previous statistics is less reliable
due to changing participants
18. Availability Bias, Framing And
Prospect Theory
Availability Bias
People assess the frequency or probability of an event by the
ease with which they can think of examples
Framing
Peoples behavioural outcomes and attitudes are influenced by
how given piece(s) of information are framed
Prospect Theory
People are far less willing to gamble with profits than losses
19. Availability Bias, Framing And
Prospect Theory (cont.)
Loss Aversion
People gamble with losses because we cannot bear to cope
with losses so we will do anything to avoid them
Disposition effect
People are predisposed to holding losers and selling winners
Status quo bias
Strong psychological benefits brought about by taking no
action and avoiding loss realization
20. Points To Think About With Our
Trading
1. When entering a position ALWAYS put your stop loss in the
system
2. Think about your Risk/Reward ratio, don’t be too aggressive
with your ratio, have adequate stop loss buffers
3. Be clinical with loss realization, recognise its part of being in
this business and not a failure per se. Confront any negative
emotional responses to losses and develop positive
behavioural strategies
4. It is far better to gamble with profits than losses, letting your
profits run allows your returns to increase exponentially,
pulling stops to break even when in a profitable position
(where it makes sense technically), and partial profit
realization are effective ways to do this
21. Summary
The field of behavioural finance whilst still subject to
considerable debate offers valuable insight into the flaws in
our decision making process and our desire for shortcuts.
At the very least, knowledge of the ideas discussed today
will help us as traders increase our awareness of these
biases thereby introducing a more objective framework
within which we trade.
22. Questions?
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