THE ROLE OF SOCIO-ECONOMIC THEORY IN FINANCIAL MARKET: REVIEW OF INVESTORS BEHAVIOUR AND THEIR PSYCHOLOGICAL BIASES

Yıl 2016, Cilt: 3 Sayı: 3, 192 - 200, 30.09.2016

Heitham Al-hajieh

https://doi.org/10.17261/Pressacademia.2016321987

Öz

The efficient market hypothesis assumes that investors behave
rationally, by using all relevant information, and analyse it in the most
effective way to achieve the best possible outcome. However, many investors
appear to behave in irrational ways. For example, irrelevant information, such
as rumour, is used and the analysis may be subject to misinterpretation,
emotion and other psychological bias. Investors may not base decisions on their
own views about investments, but upon what they see as the majority view. The
majority being followed are not necessarily well-informed rational investors.
The investors that are followed may be uninformed and subject to psychological
biases that render their behaviour irrational (from the perspective of
economists). Rational investors may even focus on predicting the behaviour of
irrational investors rather than trying to ascertain fundamental value. This
may explain the popularity of technical analysis amongst market professionals.
This paper compares and evaluates the existing literature of psychological bias,
based on the critical analysis of uneconomic variables, such as weather and
biorhythmic variables, on investors’ mood that are found in the literature.
This paper argues for the need to develop a new methodology to examine the
efficient market hypothesis by reflecting psychological bias as a main driver
of financial market assessment.

Anahtar Kelimeler

Socio-economic theory, investors behaviour, psychological biases

Kaynakça

• Baker, H. and J. Nofsinger (2002), ‘Psychological Biases of Investors’, Financial Services Review, 11(2): 97–116.
• Banerjee, A. V. (1992), ‘A Simple Model of Herd Behavior’, Quarterly Journal of Economics, 107(3): 797–817.
• Barber, B. and T. Odean (1999), ‘The Courage of Misguided Convictions’, Financial Analysts Journal, 55(6): 41–55.
• Barber, B. and T. Odean (2001), ‘Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment’, Quarterly Journal of Economics, 116(1): 261–292.
• Brown, G. (1999), ‘Volatility, Sentiment, and Noise Traders’, Financial Analysts Journal, 55(2): 82–90.
• Calvo, A. and E. Mendoza (1997), ‘Rational Herd Behavior and the Globalization of Securities Markets,’ working papers, Duke University.
• Chang, S., S. Chen, R. Chou and Y. Lin (2008), ‘Weather and Intraday Patterns in Stock Returns and Trading Activity’, Journal of Banking and Finance, 32(9): 1754–1766.
• Davis, A. (2006), ‘The Role of the Mass Media in Investor Relations’, Journal of Communication Management, 10(1): 7–17.
• DeLong, J., A. Shleifer, L. Summers and R. Waldmann (1990), ‘Noise Trader Risk in Financial Markets’, Journal of Political Economy, 98(4): 703–738.
• Deutsch, M. and H. Gerard (1955), ‘A Study of Normative and Informational Influence upon Individual Judgment’, Journal of Abnormal and Social Psychology, 51(3): 629–636.
• Dowling, M. and B. Lucey (2008), ‘Robust Global Mood Influences in Equity Pricing’, Journal of Multinational Financial Management, 18(2): 145–164.
• Dunn, J. and M. Schweitzer (2005), ‘Feeling and Believing: The Influence of Emotions on Trust’, Journal of Personality and Social Psychology, 88(5): 736–748.
• Ellison, G. and D. Fudenberg (1993), ‘Rules of Thumb for Social Learning’, Journal of Political Economy, 101(4): 612–643.
• Gervais, S. and T. Odean (2001), ‘Learning to be overconfident’, Review of Financial Studies, 14(1): 1–27.
• Green, S. (2004), ‘The development of China’s Stock Market, 1984–2002: Equity Politics and Market Institutions’, Oxford and New York: Routledge.
• Hirshleifer, D. (2001), ‘Investor Psychology and Asset Pricing’, Journal of Finance, 56(4): 1533–1598.
• Hirshleifer, D. and T. Shumway (2003), ‘Good day sunshine: Stock returns and the weather’, Journal of Finance, 58(3): 1009–1032.
• Hwang, S. and M. Salmon (2006), Sentiment and Beta Herding, paper presented to the Behavioural Finance and Market Efficiency Workshop, University of Warwick, March.
• Kaminsky, G. and S. Schmukler (1999), ‘What triggers market jitters? A chronicle of the Asian crisis’, Journal of International Money and Finance, 18(4): 537–560.
• Kamstra, M., L. Kramer, and M. Levi (2003), ‘Winter blues: A SAD stock market cycle’, American Economic Review, 93(1): 324–343.
• Kaplanski, G. and H. Levy (2009), ‘Seasonality in Perceived Risk: A Sentiment Effect,’ working papers, Jerusalem School of Business Administration.
• Kavanagh, D., J. Andrade and J. May (2005), ‘Imaginary Relish and Exquisite Torture: The Elaborated Intrusion Theory of Desire’, Psychological Review, 112(2): 446–467.
• Kliger, D. and O. Levy (2003), ‘Mood and Judgment of Subjective Probabilities: Evidence from the U.S. Index Option Market’, European Finance Review, 7(2): 235–248.
• Kultti, K. and P. Miettinen (2006), ‘Herding With Costly Information’, International Game Theory Review, 8(1): 21–31.
• Langer, E. J. (1975), ‘The Illusion of Control’, Journal of Personality and Social Psychology, 32(2): 311–328.
• Mehra, R. and R. Sah (2002), ‘Mood fluctuations, projection bias, and volatility of equity prices’, Journal of Economic Dynamics and Control, 26(5): 869–887.
• Nofsinger, J. (2002), ‘Do Optimists Make the Best Investors?’, Corporate Finance Review, 6(4): 11–17.
• Nofsinger, J. (2005), The Psychology of Investing, London: Prentice Hall.
• Olson, K. (2006), ‘A Literature Review of Social Mood’, Journal of Behavioral Finance, 7(4): 193–203.
• Patterson, D. and V. Sharma (2007), ‘Did Herding Cause the Stock Market Bubble of 1998-2001?,’ working papers, Social Science Research Network.
• Peterson, D. and G. Pitz (1988), ‘Confidence, Uncertainty, and the Use of Information’, Journal of Experimental Psychology, 14(1): 85–92.
• Petrochilos, G. A. (2010), Ethics, Responsibility, Regulation and Economics (or Saving Capitalism from Itself), Business & Economics Society International Conference, Athens, Greece.
• Prechter, R. (1985), Popular Culture and the Stock Market, US: New Classics Library.
• Prechter, R. (1999), The Wave Principle of Human Social Behavior and the New Science of Socionomics, US: New Classics Library.
• Prechter, R. and D. Parker (2007), ‘The Financial/Economic Dichotomy in Social Behavioral Dynamics: The Socionomic Perspective’, Journal of Behavioral Finance, 8(2): 84–108.
• Presson, P. and V. Benassi (1996), ‘Illusion of Control: A Meta-Analytic Review’, Journal of Social Behavior and Personality, 11(3): 493–510.
• Redhead, K. (2008), Personal Finance and Investments: A Behavioural Finance Perspective, Oxford and New York: Routledge.
• Shiller, R. (2000), Irrational Exuberance. US: Princeton University Press.
• Statman, M., S. Thorley and K. Vorkink (2006), ‘Investor Overconfidence and Trading Volume’, Review of Financial Studies, 19(4): 1531–1565.
• Walter, A. and F. Weber (2006), ‘Herding in the German Mutual Fund Industry’, European Financial Management, 12: 375–406.
• Welch, I. (2000). ‘Herding among Security Analysts’, Journal of Financial Economics, 58(3): 369–396.
• Wright, W. and G. Bower (1992), ‘Mood Effects on Subjective Probability Assessment’, Organizational Behavior and Human Decision Processes, 52(2): 276–291.
• Yuen, K. and T. Lee (2003), ‘Could Mood State Affect Risk-Taking Decisions?’, Journal of Affective Disorders, 75(1): 11–18.