Sri Lanka Equity Forum
Dear Reader,

Registration with the Sri Lanka Equity Forum would enable you to enjoy an array of other services such as Member Rankings, User Groups, Own Posts & Profile, Exclusive Research, Live Chat Box etc..

All information contained in this forum is subject to Disclaimer Notice published.


Thank You
Sri Lanka Equity Forum
Sri Lanka Equity Forum

Discussion Forum for Stock Market Investors in Sri Lanka

සිංහල පරිවර්තනය
Submit Post
Submit Post
Market Place

Add an ad

View all ads

Latest topics

» CSE from Dawn of Peace to Rebirth of Terrorism
by mark Yesterday at 11:31 pm

» INVEST ON AAIC, HASU, UAL.... YOU WILL NEVER WORRY......
by karuna2 Yesterday at 11:10 pm

» Sri Lanka’s largest pension fund EPF return to Colombo Stocks
by wisdom79 Yesterday at 10:46 pm

» Sri Lanka’s Top 10 Imports
by God Father Yesterday at 8:34 pm

» Sri Lanka's EPF enters stock market with blood in the streets
by God Father Yesterday at 8:21 pm

» Sri Lanka caught in the big power conflicts
by God Father Yesterday at 8:16 pm

» Pakistan’s trade with Sri Lanka comes to a halt
by God Father Yesterday at 8:12 pm

» Why AAIC Should trade above RS.50/-
by wisdom79 Yesterday at 8:04 pm

» Market will test 4700
by karuna2 Yesterday at 8:04 pm

» Daily Stock Market Update
by Insights Equity Yesterday at 5:21 pm

» Hight Profile Selling at EAST
by Uaecoindubai Yesterday at 4:43 pm

» INVITATION TO FORUM MODERATORS
by Sstar Yesterday at 1:38 pm

» A Trader’s Guide to FIX Engine
by Brenda John Yesterday at 11:24 am

» Reasons for market to crash
by Uaecoindubai Yesterday at 10:08 am

» ගෙවුම් ශේෂය, වාහන බලපත් හා ඩොලරයේ මිල
by ChooBoy Mon May 20, 2019 5:59 pm

» Terrorism and its Impact on the Sri Lankan Economy
by ChooBoy Mon May 20, 2019 5:41 pm

» Top 10 Small Scale Business ideas & Opportunities in Sri Lanka 2019
by ChooBoy Mon May 20, 2019 4:39 pm

» Sri Lanka Equity Market Place
by Sstar Mon May 20, 2019 4:36 pm

» Sri Lanka Equity Market Talk
by Sstar Mon May 20, 2019 12:23 pm

» Sri Lanka Equity Market Help
by Sstar Mon May 20, 2019 12:18 pm

» LOFC IN FOR A BIG RUN
by stockback Sun May 19, 2019 5:20 pm

» Look PAP Amazing company
by Uaecoindubai Sun May 19, 2019 5:13 pm

» Sri Lanka Equity Market Place
by Uaecoindubai Sun May 19, 2019 5:13 pm

» CSE NOW AND AFTER ELECTION
by Ahcha Sun May 19, 2019 4:40 pm

» Do not be greedy, rely on small profits Guide to the markets
by Asoka Samarakone Sun May 19, 2019 12:11 pm

» 6 % of EPF funds in stock market
by hammurabi Sat May 18, 2019 3:47 pm

» Weekly Stock Market Roundup
by Insights Equity Sat May 18, 2019 12:54 pm

» EPF Enter Stock Market
by visvajith Sat May 18, 2019 12:20 pm

» UNION BANK (UBC) to be takeover by Union bank of india
by Soilconomy Sat May 18, 2019 8:54 am

» SEC yet to publish its 2017 Annual Report
by ChooBoy Sat May 18, 2019 6:01 am

» EAST Steady at 18
by Chanaka303 Fri May 17, 2019 10:20 pm

» 20th MAY IS IT A HOLIDAY FOR CSE?
by Winner123 Fri May 17, 2019 1:33 pm

» East total Hotel deal value US $ 58 Mn there will be another Dividend, Nahil's family is smart
by karuna2 Fri May 17, 2019 6:48 am

» What is going on with TFC.N0000
by Gihan04 Thu May 16, 2019 11:58 pm

» Sri Lanka's Commercial Bank's deposits surpass landmark Rs 1 Trillion in Q1 2019
by hammurabi Thu May 16, 2019 8:05 pm

» LIOC upward curve
by hammurabi Thu May 16, 2019 7:42 pm

» Maithree pala siresenas next winning chance
by Uaecoindubai Thu May 16, 2019 5:10 pm

» RENUKA CAPITAL PLC KZOO.N0000@2.80
by Uaecoindubai Thu May 16, 2019 5:05 pm

» Mahaweli coconut will be listed soon
by Uaecoindubai Thu May 16, 2019 4:57 pm

» BALA can come down to 9/-
by Uaecoindubai Thu May 16, 2019 1:08 pm

» Sri Lanka's tourist industry has debt and tax relief of up to two years????
by Uaecoindubai Thu May 16, 2019 1:08 pm

» BFN slowly slowly unloading
by Uaecoindubai Thu May 16, 2019 1:04 pm

» Dark times - Sampath Bank
by Uaecoindubai Thu May 16, 2019 12:55 pm

You are not connected. Please login or register

Sri Lanka Equity Forum » Stock Market Talk » Expert Chamber » An Introduction to Behavioral Finance

An Introduction to Behavioral Finance

Go down  Message [Page 1 of 1]

1An Introduction to Behavioral Finance Empty An Introduction to Behavioral Finance on Fri Oct 18, 2013 5:30 pm

D.G.Dayaratne


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
An Introduction To Behavioral Finance
October 16 2011| Filed Under »

It's hard not to think of the stock market as a person: it has moods that can turn from irritable to euphoric; it can also react hastily one day and make amends the next. But can psychology really help us understand financial markets? Does it provide us with hands-on stock picking strategies? Behavioral finance theorists suggest that it can.

Tutorial: Behavioral Finance

Tenets and Findings of Behavioral Finance
This field of study argues that people are not nearly as rational as traditional finance theory makes out. For investors who are curious about how emotions and biases drive share prices, behavioral finance offers some interesting descriptions and explanations.

The idea that psychology drives stock market movements flies in the face of established theories that advocate the notion that markets are efficient. Proponents of efficient market hypothesis say that any new information relevant to a company's value is quickly priced by the market through the process of arbitrage. (For further reading on market efficiency, see Mad Money ... Mad Market?, Working Through The Efficient Market Hypothesis and What Is Market Efficiency?)

For anyone who has been through the Internet bubble and the subsequent crash, the efficient market theory is pretty hard to swallow. Behaviorists explain that, rather than being anomalies, irrational behavior is commonplace. In fact, researchers have regularly reproduced market behavior using very simple experiments.

Importance of Losses Versus Significance of Gains
Here is one experiment: offer someone a choice of a sure $50 or, on the flip of a coin, the possibility of winning $100 or winning nothing. Chances are the person will pocket the sure thing. Conversely, offer a choice of a sure loss of $50 or, on a flip of a coin, a loss of $100 or nothing. The person will probably take the coin toss. The chance of the coin flipping either way is equivalent for both scenarios, yet people will go for the coin toss to save themselves from loss even though the coin flip could mean an even greater loss. People tend to view the possibility of recouping a loss as more important than the possibility of greater gain.

The priority of avoiding losses holds true also for investors. Just think of Nortel Networks shareholders who watched their stock's value plummet from over $100 a share in early 2000 to less than $2. No matter how low the price drops, investors, believing that the price will eventually come back, often hold onto stocks..

FXCM -Online Currency Trading Free $50,000 Practice Account An Introduction to Behavioral Finance 112502
The Herd Versus the Self
Herd instinct explains why people tend to imitate others. When a market is moving up or down, investors are subject to a fear that others know more or have more information. As a consequence, investors feel a strong impulse to do what others are doing.

Behavior finance has also found that investors tend to place too much worth on judgments derived from small samples of data or from single sources. For instance, investors are known to attribute skill rather than luck to an analyst that picks a winning stock.

On the other hand, investors' beliefs are not easily shaken. One belief that gripped investors through the late 1990s was that any sudden drop in the market is a good time to buy. Indeed, this view still pervades. Investors are often overconfident in their judgments and tend to pounce on a single "telling" detail rather than the more obvious average.

How Practical Is Behavioral Finance?
We can ask ourselves if these studies will help investors beat the market. After all, rational shortcomings ought to provide plenty of profitable opportunities for wise investors. In practice, however, few if any value investors are deploying behavioral principles to sort out which cheap stocks actually offer returns that can be taken to the bank. The impact of behavioral finance research still remains greater in academia than in practical money management.

While it points to numerous rational shortcomings, the field offers little in the way of solutions that make money from market manias. Robert Shiller, author of "Irrational Exuberance" (2000), showed that in the late 1990s, the market was in the thick of a bubble. But he couldn't say when it would pop. Similarly, today's behaviorists can't tell us when the market has hit bottom. They can, however, describe what it might look like.

Conclusion
The behavioralists have yet to come up with a coherent model that actually predicts the future rather than merely explains, with the benefit of hindsight, what the market did in the past. The big lesson is that theory doesn't tell people how to beat the market. Instead, it tells us that psychology causes market prices and fundamental values to diverge for a long time.

Behavioral finance offers no investment miracles, but perhaps it can help investors train themselves how to be watchful of their behavior and, in turn, avoid mistakes that will decrease their personal wealth.

To continue reading on behavior-based trading, see Trading Psychology: Consensus Indicators - Part 1, Leading Indicators Of Behavioral Finance, Understanding Investor Behavior and The Madness Of Crowds.

Source - Investopedia

by
Ben McClure

An Introduction to Behavioral Finance Ben_mcclure
Ben McClure is a long-time contributor to Investopedia.com. A specialist in preparing early stage technology ventures for investment and the marketplace, Ben manages the Business Incubator at the University of Malta. Ben was a highly-rated European equities analyst at London-based Old Mutual Securities, and led new venture development at TEC Edmonton, a major technology commercialization consulting group in Canada.



Last edited by smallville on Fri Oct 18, 2013 5:38 pm; edited 4 times in total

2An Introduction to Behavioral Finance Empty Re: An Introduction to Behavioral Finance on Fri Oct 18, 2013 5:41 pm

smallville

smallville
Associate Director - Equity Analytics
Associate Director - Equity Analytics
Thanks for the good article.. Pls, next time, hope u can publish in correct section.. I guess this should go to "market chart and graph or help".

If the intention is to further elaborate, discuss a news topic or a "how to", pls mention "- Discuss" or similar line after the topic..

Once again, thanks.

3An Introduction to Behavioral Finance Empty Re: An Introduction to Behavioral Finance on Fri Oct 18, 2013 5:49 pm

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics

Back to top  Message [Page 1 of 1]

Permissions in this forum:
You cannot reply to topics in this forum