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Cognitive Biases and Their Implications for Price Formation on Financial Markets

Cognitive Biases and Their Implications for Price Formation on Financial Markets
Author: Michael Kaestner
Publisher:
Total Pages: 301
Release: 2006
Genre:
ISBN:
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Behavioral Finance argues that several anomalies could be explained by relaxing the central proposition of EMH (Efficient Market Hypothesis), that is, investors' rationality. Indeed, recent empirical and experimental work provides additional evidence that human judgment errors may impact financial market price behavior instead of simply canceling each other out.Our work aims to provide a better understanding of several cognitive biases, human judgment errors occurring during mental information processing and decision making. We propose a general mathematical framework of price formation, allowing for subsequent modeling of individual cognitive biases, without affecting the underlying assumptions. Price characteristics, such as expected equilibrium price, volatility but also trading volumes, can be potentially analyzed for each bias' functional form. This theoretical work on some specific cognitive biases allowed for further empirical research, using quarterly earnings estimates, announcements and subsequent price reaction data for listed US companies over the period 1983-1999. We selected events, for which previous earnings information pointed to a highly probable bias; which could be either an anchoring bias to previous earnings values or a representativeness bias given a series of past earnings surprises. We showed that these events exhibit, at the time of the current earnings announcement, important and highly significant abnormal returns, indicating a correction phenomenon of the (assumed) previous under- or over-reaction.

Information Asymetry and Price Formation When Cognitive Biases Affect Traders' Strategies

Information Asymetry and Price Formation When Cognitive Biases Affect Traders' Strategies
Author: Michael Kaestner
Publisher:
Total Pages: 21
Release: 2006
Genre:
ISBN:
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Behavioral Finance aims to propose a theoretical alternative to EMH (Efficient Market Hypothesis), allowing for not fully rational behavior. Understanding price formation when some agents are victim of cognitive biases is one of the most important research fields.We propose an extension of Grossman et Stiglitz (1980)'s framework by integrating investors, who do not update their beliefs fully rationaly, using (1)incorrect priors and/or failing to assess correctly the quality of their private signal. We evaluate the impact of the considered bias on the efficiency of the price system and show that individual biases are partially transmitted to uninformed agents, who try to infer the private signal.

The Financial Consequences of Behavioural Biases

The Financial Consequences of Behavioural Biases
Author: Imad A. Moosa
Publisher: Springer
Total Pages: 184
Release: 2017-10-25
Genre: Business & Economics
ISBN: 3319693891
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This book provides a concise analysis of behavioural biases and their implications for financial decision making. The book is written in the normative tradition, arguing strongly for the superiority of behavioural finance with respect to explaining observed phenomena in financial markets. It offers some unique features, including a discussion of the issue of conspiracy theory and how behavioural biases lead to belief in conspiracy theories. Lingering belief in the principles of neoclassical finance is attributed in part to the doctrine of publish or perish, which dominates contemporary academia. The offshoots of behavioural finance are discussed in detail, including ecological finance, environmental finance, social finance, experimental finance, neurofinance, and emotional finance. A comprehensive discussion of narcissism is presented where it is demonstrated that narcissistic behaviour is prevalent in the finance industry and that it led to the eruption of the global financial crisis.

Behavioral Finance: Where Do Investors' Biases Come From?

Behavioral Finance: Where Do Investors' Biases Come From?
Author: Itzhak Venezia
Publisher: World Scientific
Total Pages: 395
Release: 2016-10-27
Genre: Business & Economics
ISBN: 9813100109
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This unique volume presents new original research exploring factors that lead to investors behavioral biases. It discusses how features such as professionalism, sophistication, gender, media, and culture influence investors' decision-making in general, and in particular, how they generate (or limit) behavioral and cognitive biases. The effects of these factors on capital markets are also discussed. The book is based on the discussions and presentations at the First Israel Behavioral Finance Conference, which took place in Tel Aviv in May 2015. It examines in greater detail some of the key issues discussed at the conference.This is an innovative book in behavioral finance: it is the first to present an extensive collection of papers which discuss a comprehensive array of factors that influence or define investor character and analyzes these factors' effects on financial markets. The book is useful for readers interested in understanding the factors that influence investors' profiles and thus their behavioral biases. The book will be of great interest to researchers and students seeking a reference book which contains timely research on these areas of behavioral finance.

The Effects of Anchoring Bias on Behavior in Financial Markets

The Effects of Anchoring Bias on Behavior in Financial Markets
Author: Pascal Hlavka
Publisher: GRIN Verlag
Total Pages: 25
Release: 2022-02-14
Genre: Business & Economics
ISBN: 3346591190
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Seminar paper from the year 2021 in the subject Economics - Finance, grade: 1.7, LMU Munich, language: English, abstract: The phenomenon of Anchoring bias refers to the influence of arbitrary numbers in decision-making under uncertainty. Humans are affected by anchors on a daily basis, especially when confronted with quantitative tasks. However, basic anchoring effects appear even when individuals are not expected to compare the value to a certain estimation task. Many researchers tried to figure out the reasons for the anchoring bias. Kahnemann et alii conducted three studies and concluded anchoring bias as the disability of adjustment processes. In an experimental setting the anchoring effects are examined by first showing the participant an arbitrary number, then comparing it to a certain targeted value and finally giving an own estimation. The anchoring bias appears in the last step as the estimation is inevitably biased toward the initial anchor. An alternative explanation is found in the studies conducted by Mussweiler et al. They suggest that the anchoring effect is rather a combination of insufficient adjustment and selective accessibility. This paper aims to combine both explanations and test four hypotheses in an experimental setting related to financial markets. The first assumption to be tested is whether a comparative task yields to higher anchoring bias when an anchor is provided or self-generated. The second hypothesis to be proved is whether the anchoring bias can mitigate by giving explanations on the comparative task answers. Thirdly, the paper assumes a positive correlation between motivation and cognitive capacity influence the estimates significantly. Finally, this paper extents the research by asking whether risk-aversion is correlated to the anchoring bias.

"The Trader's Mind."

Author:
Publisher: DANIEL SANDOVAL
Total Pages: 98
Release: 2023-07-06
Genre: Art
ISBN:
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"The Trader's Mind: Psychology and Success in the Financial Market" is a book that explores the importance of psychology in trading and how it influences traders' success in the financial market. Written by experts in psychology and finance, the book provides an in-depth look at the mental and emotional aspects that influence investment decisions. The book begins by introducing the basic concepts of trading and highlighting the importance of having the right mindset to face the challenges of the financial market. It stresses that trading is not only about analyzing charts and figures, but also involves managing emotions and maintaining a disciplined attitude. As it progresses, the book explores key themes such as fear, greed, impatience and overconfidence, and how these factors can negatively affect investment decisions. Strategies and techniques for managing these emotions are offered, such as setting clear boundaries and rules, meditation and visualization, and developing emotional discipline. In addition to addressing the emotional aspects, "The Trader's Mind" also examines the importance of cognitive analysis in trading. Common cognitive biases, such as confirmation bias and availability bias, are explored and tools are provided to counteract these erroneous thought patterns. The book emphasizes the need to be aware of one's biases and how they can affect decision making in the market. Throughout the book, real examples of trading situations are presented and analyzed from a psychological perspective, giving readers a deeper understanding of how mental aspects influence financial results. In summary, "The Trader's Mind: Psychology and Success in the Financial Market" is a valuable resource for traders who want to improve their performance. It provides enriching insights into how psychology affects investment decisions and offers practical strategies for developing a sound and disciplined trading mindset. By understanding and addressing the mental and emotional aspects of trading, traders can increase their chances of success in the financial marketplace.

Investor Behavior

Investor Behavior
Author: H. Kent Baker
Publisher: John Wiley & Sons
Total Pages: 645
Release: 2014-02-10
Genre: Business & Economics
ISBN: 1118492986
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WINNER, Business: Personal Finance/Investing, 2015 USA Best Book Awards FINALIST, Business: Reference, 2015 USA Best Book Awards Investor Behavior provides readers with a comprehensive understanding and the latest research in the area of behavioral finance and investor decision making. Blending contributions from noted academics and experienced practitioners, this 30-chapter book will provide investment professionals with insights on how to understand and manage client behavior; a framework for interpreting financial market activity; and an in-depth understanding of this important new field of investment research. The book should also be of interest to academics, investors, and students. The book will cover the major principles of investor psychology, including heuristics, bounded rationality, regret theory, mental accounting, framing, prospect theory, and loss aversion. Specific sections of the book will delve into the role of personality traits, financial therapy, retirement planning, financial coaching, and emotions in investment decisions. Other topics covered include risk perception and tolerance, asset allocation decisions under inertia and inattention bias; evidenced based financial planning, motivation and satisfaction, behavioral investment management, and neurofinance. Contributions will delve into the behavioral underpinnings of various trading and investment topics including trader psychology, stock momentum, earnings surprises, and anomalies. The final chapters of the book examine new research on socially responsible investing, mutual funds, and real estate investing from a behavioral perspective. Empirical evidence and current literature about each type of investment issue are featured. Cited research studies are presented in a straightforward manner focusing on the comprehension of study findings, rather than on the details of mathematical frameworks.

Behavioural Biases in Financial Markets

Behavioural Biases in Financial Markets
Author: Maria Tselika
Publisher:
Total Pages: 0
Release: 2020
Genre:
ISBN:
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The introduction of cognitive limitations and psychological barriers to human decision making lies behind the identification of collective behavior in economics and finance. Herding, is such a manifestation of mimetic behavior and is defined as the tendency of financial agents to follow their peers, even disregarding their personal information set. Through examination of the existing literature, this thesis identifies a discontinuity between the theoretical conception of herding and its empirical identification. Empirical models of herding are divided into herding in the level of investors and herding to the consensus of returns. Existing empirical models of herding to the consensus of returns, neither consider herding in micro-level nor account for important factors, such as price variability, that affect both the methodology developed to identify macro level herding, based on the measures of cross- sectional dispersion of returns, and the decision making process of financial agents. Using a combination of trading and stock related data, this thesis, initially examines the disagreement of empirical results of herding in the micro level compared to that of consensus of returns. Evidence that micro-level herding, the composition of the market in terms of investors and the direction of herding affect the mechanism of transmission of herding to the consensus of returns arise. Moreover, further methodological examination of the measures of dispersion of assets, reveals a relation between realized volatility and macro-level herding. This thesis encounters evidence that the existing methodologies for the identification of herding, do not consider the mechanism of transmission of herding from flows to returns and the methodological and conceptual importance of price variability.

Cognitive Biases

Cognitive Biases
Author: Henry Priest
Publisher:
Total Pages: 314
Release: 2019-10-06
Genre:
ISBN: 9781697925777
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Cognitive biases impair decisions in powerful ways. Particularly disastrous are their effects on financial decisions. Are you in the banking and financial services sector? Do you wish to avoid a situation like the recent financial crisis? Are you constantly inspired by successful executives, and want to improve yourself and reach the level of CEOs? Do you know that all of us have mental blind spots which prevent us from being rational? If you have seen or read about the recent financial crisis that straddled across the globe and brought down some of the oldest and most venerated financial institutions in the world, then you need this book! Here I discuss 151 powerful cognitive biases that you must avoid in order to succeed. Note: This book has 2 manuscripts in 1 volume Book 1: Biased: 50 Powerful Cognitive Biases That Impair Our Judgment (Learn how to de-bias your decisions of 50 most powerful psychological biases) Book 2: Biases in Banking and Finance (Advanced guide on cognitive biases, focussing on biases which are common in business and banking) If you want to learn how to be improve decisions, then this book is for you. In this book you will learn about: * The 50 most powerful cognitive biases that impair business and financial decisions * Understanding how cognitive biases work, and techniques to overcome them * Understanding the biases afflicting businesses and banking * The secrets of staying motivated despite adversity and failure. Here are the answers to some questions you might have about this book: Q: What is this book about? A: This book is a 2-in-1 guide on how to identify cognitive biases. In this book you learn about powerful cognitive biases which afflict our economic behaviour. Understanding how biases work can help us avoid these biases, and even use the biases of our competitors to our advantage. Q: What kind of techniques will I get to learn in this book? A: In Book 1, I bring out 50 powerful cognitive biases that impair human decisions. In Book 2, you will get to learn about more biases that impair decisions, particularly in the world of banking and finance. Q: Do I need to have prior qualifications before I read this book? A: The only thing that is required is your keenness to learn. Some experience in the financial sector or knowledge of basic economics can make the grasping faster, but it is not a prerequisite. Every day that you delay is another day that you stagnate in your growth as a manager-leader. Take action now and buy this book by clicking the 'Buy Now' or 'Buy Now with 1-Click' button