1. 1 文献的汇报 19/6/2012 潘科钢

2. 2 INTRODUCTION OF BEHAVIORAL FINANCE In recent years, behavioral finance has been risen interest in its application to analyze investor behavior. The developments of behavioral finance theory and its successful application in explaining investors’ behavior in the financial markets (Jo & Kim, 2008). In addition, the limitations of traditional finance in understanding the investors’ behavior to explain that the reason for trading of investors, how do they perform, the way they choose their portfolio and why do returns vary across stock for reasons other than risk (Subrahmanyam, 2007).

3. 3 Standard finance is considered as a compelling theory because it uses a minimum of tools to build a unified theory which was intended to answer all the questions of finance, including: - Arbitrage Principles developed by Modigliani and Miller (1958); - Portfolio Principles developed by Markowitz (1952); - Capital Asset Pricing Theory developed by Sharpe (1964) and Lintner (1965); - Option-Pricing Theory developed by Black and Scholes (1973), and Merton (1974). INTRODUCTION OF BEHAVIORAL FINANCE (cont)

4. 4 Of late, behavioral finance is a new approach to financial markets that has emerged, at least in part, in response to the difficulties faced by the traditional paradigm (Jo& Kim, 2008). Behavioral finance is constructed with few tools that have many uses. Tools of behavioral finance include: Susceptibility to frames and other cognitive errors; varying attitudes toward risk; aversion to regret; imperfect self-control; preferences as to both utilitarian and value-expressive characteristics (Jo& Kim 2008). INTRODUCTION OF BEHAVIORAL FINANCE (cont)

5. 5 Especially, according to the surveys done from early 1980s to 2002, psychology may be of particular interest to financial economists because it’s the basis of irrationality, which leads to the core of behavioral finance (Jo & Kim, 2008). The recent development of psychology theories related to behavioral finance field showed that out of limited arbitrage theory, psychology is the second building block of behavioral finance (Shleifer and Summers, 1990). INTRODUCTION OF BEHAVIORAL FINANCE (cont)

6. 6 In which, beliefs and preferences are considered as aspects of psychological theory related to behavioral finance that it used for explaining investors’ decision - making behavior (Jo & Kim, 2008). More specifically, behavioral economists typically turn to the extensive experimental evidence compiled by cognitive psychologists on the biases that arise when people form beliefs, and on people’s preferences, or on how they make decisions, given their beliefs. INTRODUCTION OF BEHAVIORAL FINANCE (cont)

7. 7 PSYCHOLOGICAL FACTORS AFFECTING INVESTORS’ DECISION-MAKING PROCESS 1. Overconfidence 2. Optimism and Wishful Thinking 3. Representativeness 4. Belief Perseverance 5. Anchoring 6. Availbility biases

8. 8 LITERATURE SYNTHESIS ON OVERCONFIDENCE Findings in the literature on overconfidence are wide - ranging and robust (Fischohoff, 1892; Lichtenstein, Fischhoff & Phillips, 1982). People tend to be overconfident. In particular, it is well documented that people exhibit overconfident behavior in financial markets. The degree of overconfidence, however, seems to vary across individuals and across different domains of questions. Odean (1998) outlines that possibly exactly those people who are overconfident in the domain of financial markets are those who are attracted by jobs that require financial decision making.

9. 9 In the study of Lichtenstein, Fischhoff and Philips (1982) and Griffin and Tversky (1992), it has been observed that task difficulty and blurred feedback lead to more overconfidence. Odean (1998) argues that forecasting and estimating returns on financial markets are not easy tasks and the available feedback is blurred as the market prices of assets are affected by noise. So the chances to observe overconfident behavior in the domain of financial markets are high. LITERATURE SYNTHESIS ON OVERCONFIDENCE (cont)

10. 10 Previous literature shows that psychological factors have a substantial effect on people’s decision making (Jo & Kim, 2008). Tversky and Kahneman (1974) present that people rely on a limited number of heuristic principles which in general are quite useful, but sometimes lead to severe and systematic biases. Poorly calibrated decision makers are thought to make ill - advised choices based on sub - optimal information searches. Generalizing somewhat, decision makers tend to be overconfident for difficult problems and underconfident for easy problems (Lichtenstein, Fischhoff, 1977). LITERATURE SYNTHESIS ON OVERCONFIDENCE (cont)

11. 11 RELATED RESEARCH ON OVERCONFIDENCE Overconfidence is a complex phenomenon with various facets. Glaser and Weber (2003) differentiate between four different manifestations of overconfidence: miscalibration, better-than- average-effect, illusion of control and overoptimism. Normally, people tend to overestimate the precision of their knowledge. As a result, they are miscalibrated in estimating and forecasting by providing too narrow confidence intervals (Lichtenstein, Fischhoff and Philips,1982).

12. 12 Graham, Campbell and Huang (2006) and Glaser, Weber and Langer (2005) report the level of overconfidence in the domain of financial markets is different across individuals. There is no doubt that individual characteristics affect overconfidence but the evidence about stable relationships is ambiguous. According to Barber and Odean (2000) overconfidence causes excess trading which can be risky to financial well being. RELATED RESEARCH ON OVERCONFIDENCE (cont)

13. In a similar vein, Gervais and Odean (2001) find that success of traders leads to increased overconfidence. When a trader is successful, he attributes too much of his success to his own ability and revises his beliefs about his ability upward too much, which increases overconfidence. Being overconfident can be harmful on financial markets. In the survey of Odean and Barber (2001) on private investor, it is shown that overconfidence leads to a higher trading volume and reduces portfolio returns. 13 RELATED RESEARCH ON OVERCONFIDENCE (cont)

14. 14 It is stated that traders become overconfident successful trader, though not necessarily the most successful traders are most overconfident. These traders are also, as a result of success, wealthy. Overconfidence does not make traders wealthy, but the process of becoming wealthy can make them overconfident. Thus, overconfident trader can play an important long term role in financial markets. RELATED RESEARCH ON OVERCONFIDENCE (cont)

15. 15 In a model from Odean and Gervais (2001) showed that more experience is related to a lower degree of overconfidence. More specifically, inexperienced but successful investors are most prone to overconfidence as they self-attribute their success solely to their abilities. Over time more experience will help them to better evaluate their true abilities. RELATED RESEARCH ON OVERCONFIDENCE (cont)

16. 16 According to Lewellen et al (1977) overconfident investors trade more, believe returns to be highly predictable and expect higher returns than what less confident people do. In addition, according to Bukszar (2003) overconfidence in judgment would be expected to be lead to poor decisions if there were no intervening steps between judgment and decision making. RELATED RESEARCH ON OVERCONFIDENCE (cont)

17. 17 Lewellen, Lease and Schlarbaum (1977) found that men have stronger tendency to overconfident behavior than woman have. Korniotis and Kumar (2007) show that overconfidence decreases with age. Frederick (2005) presents that people with higher cognitive abilities make more optimal decisions. FACTORS AFFECTING ON EXPOSURE TO BEHAVIORAL BIASES (cont)

18. 18 An overconfidently biased perception of low risks in a volatile asset class like for example equities could increase its perceived attractiveness (Gort, et al. 2008). Additionally, overconfidence influences trading decisions of investors (Gort et al. 2008) RELATED RESEARCH ON OVERCONFIDENCE (cont)

19. 19 IN SUM People have a tendency to be overly confident about own capabilities and level of knowledge. Psychological research has discovered many ways how overconfidence affects human behavior in several fields. The effects of overconfidence on financial decisions are serious and can be risky to financial well being. The effects of overconfidence are strongly present in difficult decisions that include uncertainty. Thus financial decision making is very likely affected by overconfidence.

20. REFERENCES Frederick, S. (2005), Cognitive Reflection and Decision Making, Journal of Economic Perspectives, Vol. 19, No. 4, pp.25-42. Gort, C., Wang, M. and Siegrist, M., (2008), Are pension fund managers overconfident?, The Journal of Behavioral Finance, Vol. 9, pp. 163-170. Gervais, S and Odean, T, (2001), Learning to Be Overconfident, The Review of Financial Studies, Vol.14, No. 1, pp. 1-27 Jo, H and Kim, D.M (2008), “Recent development of Behavioral Finance”, International Journal of Business Research, Vol. 8, No. 2, pp. 89-101.

21. REFERENCES (Cont) Lewelllen, W.G., Lease, R.C. and Schlarbaum, G.G., (1977), Patterns of Investment Strategy and Behavior among Individual Investors, Journal of Business, pp. 296-333. Milburn, T.W and Billings, R.S (1976), “Decision-making Perspectives from Psychology: Dealing with Risk and Uncertainty”, American Behavioral Scientist, Vol. 20, No. 1, pp. 111-124 Schoemaker, Paul.J.H (1993), “Determinants of Risk taking: Behavioral and Economics View”, Journal of Risk and Uncertainty, Vol. 6, pp. 49-73.

22. REFERENCES (cont) Rana, H. et al, (2011), “Effects of Demographic Factors on Risky Decision making Behavior”, European Journal of Social Sciences, ISSN 1450-2267, Vol. 25, No. 3 pp. 69-76. Subrahmanyam, A (2007), “Behavioral Finance: A Review and Synthesis”, European Financial Management, Vol. 14, No. 1, pp. 12-29. Sitkin, S.B and Weingart, L.R, (1995), “Determinants of risky Decision Making Behavior: A test of the mediating role of risk perceptions and propensity”, Academy of Management Journal, Vol. 38, No. 6, pp. 1573-1592. 22