Capital Market Anomalies: Explained by human´s irrationality
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Irini Varvouzou
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Capital Market Anomalies: Explained by human´s irrationality
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Anchor Academic Publishing
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9783954895304
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1
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CHF 26.80
:
:
Internationale Wirtschaft
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English
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82
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kein Kopierschutz/DRM
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PC/MAC/eReader/Tablet
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PDF
Why do small caps achieve higher risk-adjusted yields than large caps? Why do stock prices increase or decrease upon an index entry respectively deletion? Why does January records higher yields than the remaining months of the year? These as well as other observed capital market anomalies or phenomena could be insufficiently explained by the classical capital market theory, which proceeds on the assumptions that all correspondent information are reflected in the stock prices, all negative effects are directly balanced on the market level and that efficiency of arbitrage principle exists as well as that all market participants act rationally (i.e. optimizing their benefits in the sense of the homo economicus). This motivated some economists and psychologists to include behavioural scientific findings in their research of the influences on the formation of prices on the capital market. In the 1980s the theory of Behavioural Finance was developed, which challenges the homo economicus. Researchers came to the conclusion that humans are not only acting rational, but that they are also influenced by emotions, knowledge and experiences. This new scientific behavioural oriented theory, which is today a separate branch of research, contradicts the classical capital market theory and supplies explanations for the observed phenomena on the capital market. The aim of this book is to demonstrate how human behaviour influences the development on the capital market and how Behavioural Finance serves as an explanation for the empirically observed capital market anomalies. This book begins with the introduction of the theoretical basis of Behavioural Finance and its emergence; tasks as well as aims will be explained in detail. Subsequently, human's heuristics as well as anomalies and irrationalities in their decision making process will be demonstrated. In the third chapter, the capital market anomalies or phenomena as well as the irrational and behavioural reasons for their existence will be described. The fourth chapter covers empirical evidence for their existence as well as for the insufficient explanatory power of the classical capital market theory. Concluding a critical acclaim, target achievements and perspectives concerning Behavioural Finance will be given.
Irini Varvouzou, B.A., was born in Neuss in 1979. After her apprenticeship as an industrial clerk, she completed her B.A. of International Management at the FOM University of Applied Sciences in Duisburg while continuing to work in a Japanse trading house
Text Sample: Chapter 2, Theoretical Basis of Behavioural Finance: There are many definitions explaining the term Behavioural Finance. The three most commonly known definitions are as per the economists Thaler, Shefrin and Sewell. Thaler defines Behavioural Finance as an just open minded finance whereas Shefrin describes it as a fast-growing area that concerns with the influence of psychology on the behaviour of financial investors. The last economist Sewell determines it as a study, which researches the question to which extent psychical factors influence the behaviour of the market participants and their reactions the development of the financial markets. However, all definitions express the same meaning, namely that it is a behaviour-oriented financial market theory. Behavioural Finance has been developed, due to the insufficient explanatory power and predictive efficiency of classical capital market theories concerning capital market's behaviour and its phenomena. Thus its task is to explain these capital market anomalies and its phenomena e.g. bubbles, as well as its final occurrences on the financial markets e.g. overreaction und thus the pricing and performance of stocks e.g. short terms stock volatilities and to search for reasons of market inefficiencies, while including the human behaviour, i.e. psychological and sociological aspects. Not the substitution, but a paradigm shift, i.e. the further development of the existing neoclassical capital market theory - in which all information are priced into the stock prices, error compensation on the market stage and efficiency of arbitrage principle exists as well as all market participants are acting rational, i.e. optimizing their benefits in the sense of the homo oeconomicus - is in the front of this theory respectively the development of an expectation development and information processing theory. This paradigm shift includes the replacement of the homo oeconomicus by human's bounded rationality. Thus Behavioural Finance tries to create a connection between existing economical models and the reality. The target of Behavioural Finance is to identify factors, which influence human's decision making process, which consists of three steps, namely the information perception, information processing and the decision making itself. In this way Behavioural Finance disclose a set of heuristics and systematic behavioural anomalies, which lead to faulty decisions, due to restricted information level caused by information costs, limited cognitive abilities caused by complex decisional situations and psychical stress, i.e. irrationality. This bounded rationality leads to faulty behaviour, which influences the capital market. 2.1., Heuristics: As already explained in point two, in reality humans do not act in the sense of the homo oeconomicus, but are rational bounded. This rational bounded behaviour is reflected in the daily decision making process, where uncertainty exists, time, knowledge and information are limited and the complexity is high. In order to be able to make decisions under such suboptimal conditions, humans apply to heuristics. The term heuristic derives from the Greek word heurisco, which denotes to find. It is a cognitive method or strategy to solve problems, i.e. to come to decisions. Easily explained, they are mental shortcuts or rules of thumb, which facilitate and accelerate the solution of problems, i.e. the decision making process, if the above mentioned basic conditions are given. Heuristics will be applied conscious or unconscious. There is no clearly differentiation between conscious and unconscious heuristics. Conscious heuristics can become unconscious, if they will permanently be used whereas unconscious heuristics can be made aware und thus become conscious. The application of heuristics saves resources and time, which in turn will be used for other decisions. Hence they increase the efficiency of the thinking process. The results of heuristics are often correctly, but they also lead to wrong results, i.e. systematic judgemental bias, due to too strong complexity reduction and the herewith connected neglect of information. There exist three types of heuristics, which are the availability heuristic, representative heuristic and anchoring heuristic. Some authors do not classify them, but subsume them as judgmental heuristics. In contrary, others classify them as heuristics, which serve to reduce the complexity - availability heuristic - and heuristics, which serve to accelerate the decision making process - representative heuristic and anchoring heuristic. These heuristics will be explained in the following.
Capital Market Anomalies: Explained by human's irrationality
1
Table of Contents
3
1. Introduction
5
1.1. Problem Specification
5
1.2. Objective
5
1.3. Structure
5
2. Theoretical Basis of Behavioural Finance
7
2.1. Heuristics
8
2.1.1. Availability Heuristic
9
2.1.2. Representative Heuristic
10
2.1.3. Anchoring Heuristic
11
2.2. Behavioural Anomalies/Irrationalities
12
2.2.1. Information Perception Anomalies
12
2.2.1.1. Framing Effect
13
2.2.1.3. Selective Perception
15
2.2.2. Information Processing Anomalies
16
2.2.2.1. Reference Point Effect
17
2.2.2.2. Mental Accounting
17
2.2.2.3. Loss Aversion
19
2.2.3. Decision Making Anomalies
20
2.2.3.1. Cognitive Dissonance
20
2.2.3.2. Regret Avoidance
21
2.2.3.3. Overconfidence Bias
22
3. Capital Market Anomalies/Phenomena
25
3.1. Calendar Anomalies
25
3.1.1. Weekend Effect
25
3.1.2. January Effect
26
3.1.3. Turn-of-the-Month Effect
27
3.2. Figure Anomalies
28
3.2.1. Size Effect and Neglected-Firm Effect
28
3.2.2. Book-to-Market-Ratio Effect
29
3.2.3. Price-Earnings-Ratio Effect
30
3.3. Market Efficiency Anomalies
31
3.3.1. Index Effect
31
3.3.2. Bubbles and Crashs
32
3.3.3. Home Bias
33
3.3.4. Over-reaction and Under-reaction
34
3.3.5. Momentum Effect
35
3.3.6. Mean Reversion Effect
37
3.3.7. Announcement Effect
38
3.3.9. Closed-End Fund Puzzle
39
4. Empirical Evidence to the Capital Market Anomalies/Phenomena
41
4.1. Empirical Evidence to the Calendar Anomalies
41
4.1.1. Weekend Effect evidenced on International Markets
41
4.1.2. Other Studies to the remaining Calendar Anomalies
44
4.2. Empirical Evidence to the Figure Anomalies
46
4.2.1. Size Effect and Neglected-Firm Effect evidenced on the SDAX and DAX
47
4.2.2. Other Studies to the remaining Figure Anomalies
49
4.3. Empirical Evidence to the Market Efficiency Anomalies
52
4.3.1. Index Effect evidenced on the S
52
52
52
4.3.2. Bubbles and Crashs evidenced on the Tulipmania
54
5. Conclusion
57
5.1. Critical Acclaim
57
5.2. Target Achievement
57
5.3. Perspective
57
Bibliography
59
