THE MENTAL AND BEHAVIORAL MISTAKES INVESTORS MAKE (2024)

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THE MENTAL AND BEHAVIORAL MISTAKES INVESTORS MAKE

Year 2013, Volume: 5 Issue: 1, 120 - 128, 01.06.2013

Ceren UZAR G.cenk AKKAYA

Abstract

Behavioral finance results from an interdisciplinary convergence of cognitive psychology and financial economics. Behavioral finance is a field of finance that proposes psychology-based theories to explain stock market anomalies. Behavioral finance encompasses research that drops the traditional assumptions of expected utility maximization with rational investors in efficient markets.There are many concepts in behavioral finance like overconfidence, anchoring, mental accounting, herd behavior, Gambler’s fallacy, overreaction and availability bias. We first briefly discuss behavioral finance in general, and then we explain the key concepts that lead and guide to behavioral finance

Keywords

Investors, Behavioral Finance, Physchology

References

Amin, Amjad, Shoukat Sehrish and Khan Zahoor (2009), “Gambler’s Fallacy And Behavioral Finance In The Financial Markets (A Case Study Of Lahore Stock Exchange)”, Abasyn University Journal of Social Sciences,Volume 3, No. 2, July- December, pp.67-73.
Balı, Selçuk (2012), “Behaviour Of Individuals And Institutions In Relation To
Finance And Accounting”, The Journal of International Social Research, Vol:5, Issue:2, Winter, pp.304-314. Barber, Brad M., Odeon Terrance (2001), “Boys will be Boys: Gender,
Overconfidence, and Common Stock Investment”, Quarterly Journal Of Economics, Volume 116, Issue 1, pp.261-292. Barberis, Nicholas, Thaler Richard (2003), A Survey Of Behavioral Finance,
Handbook of the Economics of Finance, Edited by G.M. Constantinides, M. Harris and R. Stulz,3 Elsevier Science B.V. Barberis, Nicholas C. (2013), “Thirty Years of Prospect Theory in Economics: A
Review and Assessment”, Journal of Economic Perspectives, Volume 27, Number 1,Winter, pp.173–196. Bloomfield, Robert (2009), “Traditional Vs. Behavioral Finance”,Johnson School
Research Paper Series, 22, pp.1-19. Gneezy Ayelet, Epley Nicholas (2007), Prospect Theory, in R. F. Baumeister and K. D. Vohs: Encyclopedia of Social Psychology. Los Angeles: Sage Publications, pp. 711-714.
Grinblaltt, Mark, Han Bing (2004), Prospect Theory, Mental Accounting, and Momentum, Yale ICF Working Paper No. 00-071, pp.1-38. http://highered.mcgraw-hill.com/sites/dl/free/0070979804/662627/SampleCh09.pdf, Accessed 15.03.2013]. http://www.niftydirect.com/nsebse/marketgyan/Learning%20Session%202nd.pdf, Accessed 15.03.2013].
Johnsson,Malena, Lindblom Henrik, Platan, Peter (2002). Behavioral Finance
And the Change of Investor Behavior During and After the Speculative Bubble at the End of 1990s, Lund University: Master’s Thesis in Finance Faculty of
Business Administration. Kaestner, Michael (2006), “Investors’ Misreaction to Unexpected Earnings:
Evidence of Simultaneous Overreaction and Underreaction”,EFMA Symposium Behavioral Finance, Durham, UK, European Financial Management Association, February, pp.1-17. Kahneman, Daniel and Tversky Amos (1979), Prospect Theory: An Analysis of
Decision under Risk, Econometrica, Vol. 47, No. 2. March,pp. 263-292. Kishore, Rohit (2004), Theory of Behavioural Finance and its Application to
Property Market: A Change in Paradigm, Twelfth Annual Pacific Rim Real Estate Society Conference, January 22-25, Auckland, New Zealand,pp.1-17. Kıyılar, Murat, Acar Okan (2009), “Behavioural Finance And The Study Of The Irrational Financıal Choices Of Credit Card Users”, Annales Universitatis
Apulensis Series Oeconomica, 11(1), pp.457-468. Nik Muhammad, Nik Maheran (2009), “Behavioral Finance vs Traditional
Finance”, Advance Management Journal, Vol. 2 (6) June, pp.1-10. Phung, Albert, (2010), Behavioral Finance, http://www.investopedia.com/university/behavioral_finance/default.asp, 04.2013.
Rekik, Yosra Mefteh, Boujelbene Younes (2013), Determinants of Individual
Investors’ Behaviors: Evidence from Tunisian Stock Market, Journal of Business and Management, Vol.8, Issue.2, pp.109-119. Ricciardi, Victor (2004), “A Risk Perception Primer: A Narrative Research
Review of the Risk Perception Literature in Behavioral Accounting and Behavioral Finance”,http://papers.ssrn.com/sol3/papers.cfm?abstract_id=566802, Accessed 15.03.2013].
Ricciardi, Victor, Simon Helen K., (2000), “What is Behavirol Finance?”,
Business, Education & Technology Journal, Fall, 2(1), pp.1-9. Ritter, Jay R. (2003), “Behavioral Finance”, Pacific-Basin Finance Journal, Vol. , No. 4, September pp. 429-437.
Subash, Rahul (2012), Role of Behavioral Finance in Portfolio Investment
Decisions: Evidence from India, Charles University in Prague Faculty of Social Sciences Institute of Economic Studies, Master Thesis. Von Neumann, John, Morgenstern Oskar (1947), Theory Of Games And Economic Behavior, 2nd ed. Princeton, NJ: Princeton University Press.
Williams, Benjamin (2010), “Speculative Bubbles Dynamics and the Role of Anchoring”,
Conference, EFMA Aarhus. pp.1-19. Yalçın, Kadir Can (2009), Behavioral Finance: Investor Psychology, Marmara
University, Ph.D. Thesis.

Year 2013, Volume: 5 Issue: 1, 120 - 128, 01.06.2013

Ceren UZAR G.cenk AKKAYA

Abstract

References

Amin, Amjad, Shoukat Sehrish and Khan Zahoor (2009), “Gambler’s Fallacy And Behavioral Finance In The Financial Markets (A Case Study Of Lahore Stock Exchange)”, Abasyn University Journal of Social Sciences,Volume 3, No. 2, July- December, pp.67-73.
Balı, Selçuk (2012), “Behaviour Of Individuals And Institutions In Relation To
Finance And Accounting”, The Journal of International Social Research, Vol:5, Issue:2, Winter, pp.304-314. Barber, Brad M., Odeon Terrance (2001), “Boys will be Boys: Gender,
Overconfidence, and Common Stock Investment”, Quarterly Journal Of Economics, Volume 116, Issue 1, pp.261-292. Barberis, Nicholas, Thaler Richard (2003), A Survey Of Behavioral Finance,
Handbook of the Economics of Finance, Edited by G.M. Constantinides, M. Harris and R. Stulz,3 Elsevier Science B.V. Barberis, Nicholas C. (2013), “Thirty Years of Prospect Theory in Economics: A
Review and Assessment”, Journal of Economic Perspectives, Volume 27, Number 1,Winter, pp.173–196. Bloomfield, Robert (2009), “Traditional Vs. Behavioral Finance”,Johnson School
Research Paper Series, 22, pp.1-19. Gneezy Ayelet, Epley Nicholas (2007), Prospect Theory, in R. F. Baumeister and K. D. Vohs: Encyclopedia of Social Psychology. Los Angeles: Sage Publications, pp. 711-714.
Grinblaltt, Mark, Han Bing (2004), Prospect Theory, Mental Accounting, and Momentum, Yale ICF Working Paper No. 00-071, pp.1-38. http://highered.mcgraw-hill.com/sites/dl/free/0070979804/662627/SampleCh09.pdf, Accessed 15.03.2013]. http://www.niftydirect.com/nsebse/marketgyan/Learning%20Session%202nd.pdf, Accessed 15.03.2013].
Johnsson,Malena, Lindblom Henrik, Platan, Peter (2002). Behavioral Finance
And the Change of Investor Behavior During and After the Speculative Bubble at the End of 1990s, Lund University: Master’s Thesis in Finance Faculty of
Business Administration. Kaestner, Michael (2006), “Investors’ Misreaction to Unexpected Earnings:
Evidence of Simultaneous Overreaction and Underreaction”,EFMA Symposium Behavioral Finance, Durham, UK, European Financial Management Association, February, pp.1-17. Kahneman, Daniel and Tversky Amos (1979), Prospect Theory: An Analysis of
Decision under Risk, Econometrica, Vol. 47, No. 2. March,pp. 263-292. Kishore, Rohit (2004), Theory of Behavioural Finance and its Application to
Property Market: A Change in Paradigm, Twelfth Annual Pacific Rim Real Estate Society Conference, January 22-25, Auckland, New Zealand,pp.1-17. Kıyılar, Murat, Acar Okan (2009), “Behavioural Finance And The Study Of The Irrational Financıal Choices Of Credit Card Users”, Annales Universitatis
Apulensis Series Oeconomica, 11(1), pp.457-468. Nik Muhammad, Nik Maheran (2009), “Behavioral Finance vs Traditional
Finance”, Advance Management Journal, Vol. 2 (6) June, pp.1-10. Phung, Albert, (2010), Behavioral Finance, http://www.investopedia.com/university/behavioral_finance/default.asp, 04.2013.
Rekik, Yosra Mefteh, Boujelbene Younes (2013), Determinants of Individual
Investors’ Behaviors: Evidence from Tunisian Stock Market, Journal of Business and Management, Vol.8, Issue.2, pp.109-119. Ricciardi, Victor (2004), “A Risk Perception Primer: A Narrative Research
Review of the Risk Perception Literature in Behavioral Accounting and Behavioral Finance”,http://papers.ssrn.com/sol3/papers.cfm?abstract_id=566802, Accessed 15.03.2013].
Ricciardi, Victor, Simon Helen K., (2000), “What is Behavirol Finance?”,
Business, Education & Technology Journal, Fall, 2(1), pp.1-9. Ritter, Jay R. (2003), “Behavioral Finance”, Pacific-Basin Finance Journal, Vol. , No. 4, September pp. 429-437.
Subash, Rahul (2012), Role of Behavioral Finance in Portfolio Investment
Decisions: Evidence from India, Charles University in Prague Faculty of Social Sciences Institute of Economic Studies, Master Thesis. Von Neumann, John, Morgenstern Oskar (1947), Theory Of Games And Economic Behavior, 2nd ed. Princeton, NJ: Princeton University Press.
Williams, Benjamin (2010), “Speculative Bubbles Dynamics and the Role of Anchoring”,
Conference, EFMA Aarhus. pp.1-19. Yalçın, Kadir Can (2009), Behavioral Finance: Investor Psychology, Marmara
University, Ph.D. Thesis.

I'm a seasoned expert in the field of behavioral finance, with a deep understanding of the interdisciplinary convergence between cognitive psychology and financial economics. My knowledge extends to the intricacies of investor behavior and the theories proposed by behavioral finance to explain stock market anomalies. I've delved into various key concepts such as overconfidence, anchoring, mental accounting, herd behavior, Gambler’s fallacy, overreaction, and availability bias.

The article titled "THE MENTAL AND BEHAVIORAL MISTAKES INVESTORS MAKE" by Ceren UZAR and G. Cenk AKKAYA, published in 2013, explores the intersection of psychology and finance. It challenges traditional assumptions of expected utility maximization with rational investors in efficient markets. The research discusses the following concepts:

Overconfidence: The tendency for investors to overestimate their abilities and make decisions based on excessive confidence.
Anchoring: The psychological phenomenon where individuals rely too heavily on the first piece of information encountered when making decisions.
Mental Accounting: The concept of categorizing financial decisions into different mental accounts, leading to potentially irrational behavior.
Herd Behavior: Investors following the crowd without independent analysis, often driven by fear of missing out or panic.
Gambler’s Fallacy: Believing that past events influence future outcomes in situations where each event is independent.
Overreaction: Investors reacting disproportionately to new information, leading to exaggerated market movements.
Availability Bias: Decision-making based on readily available information rather than a comprehensive analysis.

The article emphasizes that behavioral finance deviates from traditional finance theories and sheds light on the impact of psychological factors on investment decisions. The authors reference other works in the field, such as studies on gender differences in investment behavior, prospect theory, and the dynamics of speculative bubbles.

These concepts have been extensively studied and discussed by various researchers, including scholars like Kahneman and Tversky, Nicholas Barberis, and Victor Ricciardi. The article contributes to the ongoing exploration of behavioral finance, providing insights into the mental and behavioral mistakes investors commonly make.

For a more in-depth understanding, one can refer to the cited references and related works mentioned in the article, which cover diverse aspects of behavioral finance and its applications in different financial markets.