1. What are the distinctive features of the ‘behavioral finance’ approach to the determination of asset prices? Explain how the approach can contribute to the analysis of asset market efficiency,...

Essay on distinctive features of the ‘behavioral finance’
Behavioral economics is a subsection of behavioral economics, which shows that psychological prejudice and influence can hamper the financial behavior of group of investors and financial and economic professionals. In addition, influence and prejudice may be the source of explanation for all types of market anomalies, particularly stock exchange market anomalies. For example, the stock price rises or falls sharply. Important note: Behavioral finance is a specific area of ​​research which focuses on how psychological influences hamper market outcomes. Behavioral finance can be analyzed to understand the different results of different sectors and industries. All aspects of behavioral finance research are the effects of psychological bias. Volume 75% 1:38 Behavioral Finance Understand behavioral finance can be viewed from many different perspectives. Back, but there are many angles.
The purpose of behavioral finance classification is to understand why and how people make financial decisions and in what way these decisions affect the market. One of the key aspects of behavioral finance research is the impact of bias. Distortion can appear for a variety of reasons. Deviations can generally be divided into five key concepts. When narrowing the scope of research of industry or industry findings and results, financial bias can be very important. Behavioral Finance Concepts Behavioral finance usually includes five basic concepts:
Psychological accounting: This means to the propensity of individuals to assign funds for specific purposes. Herding behavior: Herding behavior indicates that people tend to imitate the financial behavior of most sheep.As we all know, grazing stocks can cause violent rebounds and selling.
Emotional gap: Emotional gap means decisions based on high emotional stress (such as fear, anger, fear, or excitement). It is the main reason why people are not able to make rational decisions. Anchoring: Anchoring refers to the allocation of cost levels to a specific benchmark. For example, spending can always be based on the same budget level, or spend based on different profits can be simplified. Attribution refers to the tendency to make decisions based on excessive reliance on knowledge or ability. Self-attribution usually comes from the inherent ability of a specific field. In this category, even if they do not objectively meet the requirements, people tend to place their knowledge above others. Some prejudices have been discovered through behavioral finance. The further elimination of deviations enables the identification of many individual deviations and behavioral analysis trends.
Some of them are confirmation bias. Confirmation bias occurs when investors tend to agree to information that confirms their established beliefs about investment. When information appears, even if experimental errors occur, investors are willing to accept it to verify their investment decisions. When investors remember recent events or convince them that this possibility is likely to happen, experience errors occur. The event recurs; therefore, it is also called correlation distortion or accessibility distortion. The financial crises of 2008 and 2009 drove many investors out of the stock market. Many people are pessimistic about the market and may expect new economic difficulties in the next few years. Experiencing such a negative event increases your tendency or chance of the event happening again.Indeed, in the following years, the economy recovered and the market recovered. Loss aversion occurs when investors value losses more than market gains. Prioritize avoiding losses rather than gaining a return on investment. As a result of this, some investors may want larger expenditures to make up for their losses. If you are unlikely to get a large expenditure, even if the investment risk is acceptable, you can try to avoid losses altogether. When you apply loss aversion to investment, there is a so-called disposal effect, where investors sell to winners and keep losers. Investors think they want to make quick profits. Keep going because they want to re-compete or their starting price. (Nybakk, E., &Jenssen, J. I.) (2012).
The premise of traditional finance is about when an investor is a smart person who can handle all information fairly. Behavioral finance is based on real investor biases, but it is irrational, and your emotions play a role in the type of investment you make. Take, for example, a student who wants academic writing assistance. For students seeking help to start a business or online business, there are actually two companies to choose from. One is a local and the other is a foreigner; the student is likely to choose a local company. The reason for this is that, like investors, the students’ own biases influenced this decision. His overconfidence and familiarity with local companies led students to invest in the company. Foreign companies have good records and performance. Because of these prejudices, students will invest in a local company.
Traditional financing provides investors with unlimited knowledge, data, and perfect information. Investors will carefully handle this information to make this information completely reasonable.However, in behavioral finance, investors have only limited rationality, so investors will not process all information. No matter how accurate the information is, investors’ judgments are still wrong. The true value of financial markets. This argument relies on the fact that traditional finance believes investors can control themselves. However, behavioral finance believes the market is unstable, which is the reason for the abnormal market. Investors do not have perfect self-control here, so there are limitations. Market turbulence causes stock prices to rise and fall, which makes the market unstable. Investors need to understand that they can make wise financial decisions, but they must not fall into the trap of investing with emotion or motivation.
Many other articles in this guide are based on the traditional financial paradigm, which focuses on understanding financial markets through the "rational" model of agents. It means the following two things: Firstly, when agents receive new data, they will try...