EPHEMERA
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ISSN: 1298-0595
Vol.27; No. 4 (2015)
Sources of financial behavior, the dominant paradigm in financial
markets
Chung Hung
Department of Management, School of Business, Hallym University, Dasan-Hall 10339, 1
Hallymdaehak-gil, Chuncheon, Gangwon-do, 200-702, South Korea
ABSTRACT
One of the most important research programs, financial knowledge today At the
top of the efficient markets hypothesis is rejected, the theory of economic
behavior that The result of collaboration between financial and social sciences
and will deepen our knowledge of the financial markets. This paper outlines the
elements of financial behavior, namely: cognitive psychology and limitations
Arbitrage is discussed. In the Conclusion, obstacles and mistakes that may
undermine investors' financial behavior, analysis and strategies for prevention
the occurrence of such errors, suggestions are offered.
KEY WORDS: Arbitrage, behavior, financial, dominant, cognitive
Introduction
Seems to be the last fifty years in the history of financial theory and the main
transformation, summarized the neoclassical revolution in financing of the
capital asset pricing model (CAPM) Efficient market theory (EMT) in the 1960s
and the mid-term capital asset pricing model and arbitrage pricing theory (APT)
in 1970, began. The second major change, Behavioral revolution in the 1980s
with questions on financial issues Source of volatility in financial markets and
with the discovery of numerous anomalies and also trying to integrate theory
and other theories waiting and of financial theory began. The main cause of
these changes may be summed up in one sentence, Mr. Underlies Warns that as
the market changes and the manifestation of new evolutionary forces to play a
role, the winners and losers of today, yesterday and tomorrow are winners and
losers. Therefore, all changes Theoretical and practical to maintain
sustainability in the global economy. In other words, new ideas New tools for
dealing with the problems that the old ideas of accountability If they were
unable to and use of such tools and new paradigms, The economy of a country,
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EPHEMERA
http://ephemerajournal.com/
ISSN: 1298-0595
Vol.27; No. 4 (2015)
in the most optimistic case, will be able to solve old problems And did not share
in the global markets and the future.
Today we are going to explain the dominant paradigm on financial
issues, Describe and compare it to, financial behavior is called, which is simply
a thought pattern in which financial markets using complex patterns of social
sciences, psychology, Cognitive Namaland. The nascent paradigm believes
Robert Schiller is one of the most vital research programs and the efficient
market hypothesis is clearly rejected. In the second part of this paper is to
describe the behavior of financial and metals manufacturer finally, we will
present and discuss the conclusions; recommendations will be presented in a
table. Financial behavior West in the economic literature, the nature of man as a
rational creature who totally transparent decisions will be defined the present
perfect is often Referred to as the economic man, constantly optimize the
benefits of achieving desire And all the information on the options and
decisions affect the collection and the ideal situation surely that cannot be found
in the real world, many investors creates but Herbert Salmon- leading financial
behavior - economic man identified as being unrealistic in economic theory.
Meir Stamen, in an article entitled:
Review of asset allocation using challenging behavior stating that individuals
are rational in traditional financial theory while normal people's financial
behavior assumes that an investor may decide that it is not economically
justified. Financial behavior, as a theory that financial matters with the help of
theories of cognitive psychology are described the theory Modern financial
theory predicts not only questioned as efficient markets Puts it on a micro level,
the theories as to maximize the expected and rational expectations isthmuses the
theory of financial behavior in both micro and macro levels of influence:
1. Microfinance behavior (BFMI): Investors and their behavior or biases of
rational economic actors in classical economic theory, introduced back.
2. Macro-financial behavior (BFMA): Identify and describe the efficient
markets hypothesis that abnormalities in behavioral patterns might be able to
explain it financial behavior of two ingredients that include cognitive
psychology (how people think) and the limits of arbitrage (when the market is
efficient), we went on to describe the elements described above. Cognitive
Psychology AS stated earlier, it is the mentality of investors’ concerns.
Financial behavior believes that thinking is influenced by the preferences and
cognitive biases. The main difference between the two, this is reflected in the
behavior patterns and preferences should be considered, but Biases should be
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ISSN: 1298-0595
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eliminated or controlled by the templates .Preferences One of the main
components of the model to provide a better understanding of the behavior of
prices and deals tries, assumptions preferential funding. Most investors Tuesday
that they are rather important:
-Loss aversion: One of the basic principles of financial behavior, the idea that
investors are risk averse, but escape harm. In other words: people hate
uncertainty so severe, but they hate more than anything to lose. Often to the
detriment than benefit, sensitivity indicate that the penalty for a given level of
losses in mind that people are much more of a mental reward for the same level
of profits (a profit of $) are considered. This phenomenon Daniel and Amos
first expectancy theory was considered indicative of the fact that people are
stronger loss of profit perceive And the loss of more risk-averse even to escape
the situation we are.
-Aversion: This preference is due to the tendency of individuals to avoid feeling
shame and punishment is As a result of a poor investment decision inside there.
Escape to something more than mere financial loss to imagine the pain and
sorrow and sense of responsibility for the decision to include which leads to the
loss. It is possible to escape the unfortunate people to maintain joint function
Weak force, hoping to avoid the subsequent sale of the loss-averse investors. it
is possible to encounter a herd behavior. For example, most people in the stocks
of companies that are accepted by others, invest, because this type of aversion
to buying an implied warranty against.
- Mental arithmetic, mental arithmetic, a term that represents the natural
tendency of people to organize around separate mental accounts. The process by
which decision makers formulate their own questions for mental calculation
told. One of the implications of the formation of short-sighted mental
calculation, which means that investors tend to Cart Each of their assets,
separately pay Which could lead to a decision to be ineffective? With a little
attention we realize that mental arithmetic means having multiple attitudes
towards risk, as Meir Stamen believes we to assets with high safety and Assets
divided by low immunity. For example, many of the educational expenses of
their children easier (and perhaps other more economical) Allocate funds, while
the people some opportunities Separate account and seek the highest return
opportunities.
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Cognitive biases
Psychologists have found that, when economic agents to employ his own,
subject to some systematic errors. As noted earlier, the impact of these behavior
patterns are causing Biases markets are efficient. Some systematic errors in the
description of this come: IN other words, the person, events and representative
samples of a particular class know and thus a model that does not exist, for it is
there. An important consequence is that investors tend to be mistaken for
financial markets The hypothesis that recent events in the near future will
continue, So, in search of buying stocks and shares recently been
underperforming, do not buy.
-Make too: It's definitely wrong full financial behavior pattern that has been
discussed. Schiller this pattern suggests that the plain language of these people
think that they are more than what they are doing, I know it is wrong to state
where people are too important for your confidential information
manager Investors who have too much confidence in the face of new public
event, Review and revise their own assessments slower. Interestingly enough,
this is not biased in any way for individual investors or unprofessional.[Effects
of stereotypes: the study of how a decision stating that a difference In the
proposed method leads to different answers can be little question. explained this
effect: Consider a study in which a group of people are aware that investing in a
special 50%Probability of success. The group said that the investment is 50%
chance of failure. Logically, should have an equal number of members of each
group are willing to bear the risk. But this is not true in this case. When risk is
described by the probability of success, Than when the risks described in terms
of the probability of failure, the more people are willing to bear the risk. This
bias means that questions about the risks must be carefully explained. Even
precise estimates of risk tolerance, can be a poor choice of strategy.
- Reluctant effect: The tendency of modern theory is well known. This error
indicates a natural desire Quick sell winning stocks (profitable) and keep too
much stock loss (losing) is. Note that the second effect can be reluctant to
provide large losses (Avoid cutting losses and bad trades). The effect itself in
numerous small profits Show low repetition and small losses. The turnover is
influenced by this effect. Accordingly, in a growing market, increasing trading
volume, and in a stagnant market, turnover is down.
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The limits of arbitrage
In 1970, Ross Arbitrage pricing theory (APT) founded the basic concept of the
APT, the existence of a price. The two assets (shares) in the similar risk and
return cannot be sold different. By definition, Issue incorrect pricing in ways
that make a profit without risk, is called arbitrage. Arbitrage pricing theory,
investors are divided into two categories: The first batch of smart traders or
traders whose ultimate or logical ability many investors have offset errors and
the second group of traders are normal or irrational decisions are often wrong.
To better understand the concept of arbitrage, we give an example: Suppose the
market, compared Sheet Its base price is higher priced and successor This page
is also available in the market. Rational investors through short sell more
papers and simultaneously buy the same paper stock, earn a profit without risk.
Competitive activity for a large number of investors are smart or arbitrage, the
price will move towards a single price equilibrium, which is higher than the
value of stock-based pricing The base price will return. Thus, through the
process of arbitrage, until the shares are close substitutes, the ordinary trader
will be removed. Arbitrage because the effect of the return price and maintain
the efficiency of the market, Securities markets play an important role in the
analysis one of the main findings of the fiscal theory of arbitrage restrictions.
This theory suggests that if traders normally cause any deviation the value of its
asset base, the smart traders often cannot do anything because of reasons Most
of arbitrage opportunities in the securities markets in the real world are severely
restricted. First of all, the real-world markets themselves are far from perfect.
Several inconsistencies Including transaction costs, and the absence of complete
or suitable substitute for many of the securities, Repeat for each asset market,
they work extremely hard. The arbitrage forces Face substantial risk. For shortterm investment horizon and other constraints confront the forces of arbitrage,
arbitrage is a risky activity and therefore, may not be up to the forces of
arbitrage doing it.
Conclusion
The paper first introduces the concept of behavioral finance theory and then
discussed in later sections of two ingredients- - cognitive psychology and
limitations explained. Collaboration between the financial sciences and social
sciences as well as financial behavior, it will deepen our knowledge of the
financial markets, it is the presence of these financial advisors in financial
issues into the financial practitioners. Meir Stamen financial advisors
recommend: Doctors pattern to follow: Ask, Listen, diagnose, and treat you
teach. Financial advisors who act as medical, financial knowledge combined
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with their ability to help their clients. In other words, they do not think about
risk and return, it's about fear, longing and mistakes that may commit the client
will think. As doctors to promote health and well-being of individuals, financial
advisors, wealth and well-being of people raise. Electronic revolution in
communications, the most important event of our times, the complete
transformation of financial institutions in the future will be so certain of this that
we must use all the resources of science Explanatory theories were presented
with financial behavior, It is clear that the determining factor in whether or not
these theories and their effective investor. Thus the theory of quantitative
precision that can be seen in the scientific literature and textbooks, a
prerequisite for efficient markets, but certainly not a sufficient condition for an
efficient market, investors are efficient, meaning that investors who are not
biased and financial advisors are doctors.
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