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Behavioural Finance - Essay Example

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Behavioural Finance

Human behaviour and personal investment decision making can influence the trading results of a stock market and therefore, it is relevant to discuss the role of behavioural finance in the investment decisions at stock market. With this background, this paper attempts to discuss the influence of behavioural finance on the stock market performance in general and on the market bubbles and crashes in particular. The essay takes a descriptive approach wherein the present literature on these issues is mainly covered and an attempt is made to incorporate the relevant theories of behavioural finance.
Behavioural finance is one of the fast developing areas in the field of financial literature. This field of knowledge has developed a number of theories and theoretical models to explain the behavioural aspects of investment decision making. Most of the theories and models have been developed by borrowing insights from other branches such as psychology, sociology, and other behavioural sciences to analyze the behavioural aspects of investors and its influence on stock market performance. A good number of studies have been undertaken across the world to evolve behavioural theories and models so as to explain the association between the investor psychology and stock market performance. ...
ates that the economic decisions of investors are determined by the principles of perfect self-interest, perfect rationality, and perfect information (Ware2000). This is not going to be a logical view point as described by behavioural finance. Behavioural finance states that people are neither perfectly rational nor perfectly irrational; they possess diverse combinations of rational and irrational characteristics that govern their decisions on investment. This behaviour has been experienced and documented from the practical experience of investment management and stock market professionals. Thus, demographic profile and investor personality cab be key determinants of investor psychology and hence on the stock market performance (Daniela 2001).
Behavioural Finance and Stock Market Performance
The financial system of any country is composed of a vibrant stock market that mobilises and channelizes the savings of individual as well as institutional investors. The other participants in the financial system also have a bearing upon the stock market as it is often considered as the economic barometer. Stock market all over the world exhibits different behaviour depending upon the local economic developments and issues. Of course, international issues also contribute to the way stock market performs at a particular point of time. The flow of funds from different parts of a country and from different parts of the world is determined by how individual and group investors behave at different time points as a result of the information gained from time to time.
The behaviour of stock market at times cannot be explained by rational theories and models. . This vulnerability made the nature of stock market uncertain and unpredictable. The movement in the stock prices does not follow ...Show more

Summary

Behavioural finance has become one of the disciplines of great interest to investment firms, wealth management professionals and those interested in the stock market performance. Behavioural Finance is commonly understood as the application of psychological aspects of investors to financial planning and investment decision making…
Author : alvenamcclure
Behavioural Finance essay example
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