Behavioural Finance Essay Example | Topics and Well Written Essays - 1500 words

Behavioural Finance - Essay Example The researcher states that behavioral finance examines how the human animal reacts in a financial system theoretically devoid of any emotions. This has been referred to in the past as ‘open-minded finance’ which is a generous expression implying that many investors often behave in a quite contradictory manner to the advice given them by their financial advisors. ‘Proponents of behavioral finance contend that people may not always be â€Å"rational,† but they are always â€Å"human.† Thus, behavioral finance exposes the irrationality of investors in general and shows human fallibility in competitive markets.’ To many, the idea of market efficiency itself goes out the window when the concept of human behavioral finance comes in. The experience of the stock market bubble has given impetus to the theory of behavioral finance, which places greater emphasis on human motivation and market inefficiency. Yet investment bankers and business people appear to put ever greater faith in the verdict of the stock market when making judgments that can have a big impact on output and employment. One of the major contributors over the past several decades to the amount of influence individual investor behavior has on the marketplace is the plethora of information and investment resources that are now available to the individual through access to the internet as well as the constant barrage of financial pundits in the various media channels. Stocks can also be traded instantaneously (via e-trade and the like) by individuals who may have little or no real insight into what they are playing at and may send a knee-jerk reaction that if analyzed more circumspectly they may have avoided. The rise of the Internet dramatically changed the way people make investment decisions†¦ For example, the Internet fosters active involvement by providing the medium for investment chat rooms, message boards, and newsgroups. Millions of people started invest ing online over the past several years. In the late 1990s and early 2000, a tremendous surge occurred in investor trading†¦ If this online investing behavior magnifies the investor's biases, then trading patterns in those accounts that are consistent with the behavioral predictions †¦ should surface. For example, online traders should exhibit signs of overconfidence, such as more frequent trading.