Behavioral financial market theory

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The behavior-oriented financial market theory ( English behavioral finance ) is a sub-area of behavioral economics and thus a sub-area of economics . It deals with the psychology of capital investors and tries to show how investment decisions are actually made in the financial and capital markets . The behavior-oriented financial market theory assumes that people act irrationally and therefore often make incorrect decisions that lead to speculative bubbles and stock market crashes . This thesis contradicts the homo oeconomicus assumption postulated in many economics books , according to which investors always act rationally and efficiently ( market efficiency hypothesis ).

Emergence

Like many other findings from the financial industry , behavioral financial market theory also has its origins in the USA. The still young research area was discovered in the mid-1980s and has enjoyed increasing popularity ever since. For some years now, the theory has been finding more and more supporters in Europe. In addition, more and more funds are using the findings of behavioral financial market theory for their investment strategies .

In addition to other contributors, behavior-oriented financial market theory was largely shaped by three experts.

The psychologists Daniel Kahneman and Amos Tversky are considered the fathers of behavior-oriented financial market theory. Since their first collaboration in the late 1960s, the research duo has published over 200 articles on the topic. Kahneman and Tversky have based their research mainly on the findings of the cognitive bias and heuristics that lead people to irrational behavior. In 2002, Kahneman received the Alfred Nobel Memorial Prize in Economics for his contributions to the study Rationality in Economics .

While Kahneman and Tversky provided the psychology-theoretical foundation, Richard Thaler developed the actual behavior-oriented financial market theory based on this. On the basis of often irrational behavior patterns of people put Thaler weaknesses in conventional, of the assumptions homo economicus -based economic theories open. Kahneman's and Tversky's insights from psychology and Thaler's understanding of business form the basis for understanding many capital market anomalies . In 2017 Thaler, the “bridge builder between economics and psychology”, received the Nobel Prize in Economics for his contributions to behavioral financial market theory.

subjects

Key observations led the behavioral finance literature to address the lack of symmetry between decisions to acquire and retain resources. This is colloquially referred to as the " bird in the hand paradox ". Also the strong loss aversion or the strong regret that is connected with every decision in which objects with which there is a strong perceived bond (for example the house) can be completely lost. Fears of loss seem to manifest themselves in investor behavior, for example. If a sale of shares or other securities would result in a nominal loss having to be realized, an unwillingness to carry out this transaction can often be observed (Genovese & Mayer, 2001). This can also explain why prices in the real estate market do not approach asking prices when demand is weak.

Benartzi and Thaler (1995) claim that they solved the equity premium puzzle using prospectus theory. This is a puzzle that conventional financial models have so far failed to solve.

Models in behavioral economics usually refer to certain observed market anomalies and modify conventional neoclassical models by describing economic decision-makers in such a way that they act in part arbitrarily ( heuristic ) or are influenced by framing effects. In general, behavioral economics theory falls within the framework of neoclassical theory, although the traditional assumption of reasonable economic action is often challenged.

Heuristic

Systematic cognitive problems

  • cognitive classification : action based on observed patterns and signals without checking their empirical evidence
  • Indolence, being stuck in old evidence: New information is not assigned or only very hesitantly. If an assignment is made, it is often wrong.
  • Contagion: Time and success pressure as well as subjective knowledge gaps lead to uncertainty, which is overcome by observing and imitating others.
  • mental accounting
  • reference utility

Anomalies

Behavioral finance models

For more than 50 years, the neoclassical capital market theory has dominated our understanding of the processes in financial markets. It has spawned a multitude of theories and concepts (e.g. portfolio theory, capital asset pricing model or value-at-risk) and is essentially based on the assumption of a strictly rational homo economicus.

Some financial models that are used in investing and valuing assets use behavioral finance parameters , for example

  • Thaler's model of price reactions to new information, with three phases, underreaction, adjustment, and overreaction, creating a price trend;
  • the coefficient of stock valuation.

Web links

Individual evidence

  1. ↑ a b Behavioral Finance: Definition. In: FAZ.net . March 7, 2001, Retrieved November 4, 2017 .
  2. ↑ boerse.ARD.de: Definition: Behavioral Finance | Stock exchange knowledge | boerse.ARD.de. Retrieved November 4, 2017 .
  3. ^ A b Behavioral Finance: Background . In: Investopedia . February 4, 2007 ( investopedia.com [accessed November 4, 2017]).
  4. ↑ tagesschau.de: Nobel Prize in Economics: Thaler, the man for "practical help in life". Retrieved November 4, 2017 .
  5. ^ Shlomo Benartzi, Richard H. Thaler: Myopic Loss Aversion and the Equity Premium Puzzle. In: The Quarterly Journal of Economics. 110th volume, No. 1, 1995.
  6. ↑ Rolf J. Daxhammer, Máté Facsar: behavioral finance. UVK Verlagsgesellschaft mbH / UTB, Munich 2012, ISBN 978-3-8252-8504-3 .