Behavioral Finance Concept v. Efficient Market Hypothesis:
For more than a century, the concept of efficient markets has been the subject of numerous academic researches and huge debates. An efficient market is described as a market with a large number of balanced profit maximizers that are actively competing against each other to forecast the future market values for individual securities. The efficient market is also defined as a market where current information is nearly freely available and accessible to all participants. Generally, in an efficient market, competition will make complete effects of new information on essential values to be reflected instantly in real prices (Singh, 2010). The efficient market hypothesis has developed to become a significant cornerstone of contemporary financial theory even though the market seems to be more modern and characterized by increased inefficiencies. As a result, the standard finance for rational analysis framework has been placed in an awkward position that has contributed to the emergence of behavioral finance theory that shakes the authority of efficient market hypothesis.
Behavioral Finance Theory:
Behavioral finance theory is a concept that emerged in the 1980s because of the shift towards including more behavioral science into finance. This concept has attracted numerous support across several economists because of some key areas in which the reality appears to be increasingly at odds with the efficient market hypothesis (Chuvakhin, n.d.). The concept of behavioral finance is a relatively new field that is geared towards combining cognitive psychological theory with traditional economics and finance. This is mainly for the purpose of providing explanations for the reasons people make irrational financial decisions (Phung, 2010). Behavioral finance theory is a rival account of capital markets due to theoretical and empirical restrictions...
Technical Analysis in the Implication of Efficient Market Hypothesis on Silver Market The thesis is for the study of simple commonly used technical trading rules, which are applied on silver market. It covers years 1989 to 2005. A famous study carried out by Lakonishok, LebaRon and in year, 1992 has clearly shown that technical analysis can lead to abnormal prices when compared with buy-and-hold strategy. Other studies have been carried out
Behavioral Finance and Analysis of American Financial Crisis Financial theories are the cornerstone of the modern corporate world. They lay the foundation for most tools used in areas like asset pricing and investment banking. Most theoretical concepts like general equilibrium analysis and information economics are planted in the field of microeconomics. There are several different financial theories based on both consumer behavior, as well as how they impact decisions made by
Behavioral Finance and Human Interaction a Study of the Decision-Making Processes Impacting Financial Markets Understanding the Stock Market Contrasting Financial Theories Flaws of the Efficient Market Hypothesis Financial Bubbles and Chaos The stock market's dominant theory, the efficient market hypothesis (EMH) has been greatly criticized recently for its failure to account for human errors, heuristic bias, use of misinformation, psychological tendencies, in determining future expected performance and obtainable profits. Existing evidence indicates that past confidence in the
Market Efficiency and Empirical Approaches to Test for it A review and discussion of market efficiency A financial market is efficient with respect to information item, if the new information has fully influenced the market prices. In an efficient market, when a new information is made available its impact is said to be instantaneous or rapid and unbiased to the financial assets' current market prices. There are three different hypotheses that have
A number of economists suggest that markets are efficient, but this efficiency is merely assumed. In this regard, Batten points out that, "There is no actual proof. It is virtually impossible to test for market efficiency since the 'correct' prices cannot be observed. To get over this hurdle, most tests examine the ability of information-based trading strategies to make above-normal returns. But the results of such tests do not
QUESTION 1.Overconfidence (excessive optimism) is very commonly observed in human beings. Overconfidence leads to which types of irrational behavior in financial markets? Please list 3 and explain in detail.i. Over-precisionThe third form of irrational behavior is over-precision, being too confident you know the verity and truths. For instance, Trump shows over-precision when he claims surety concerning opinions not in line with reality. He claimed that Arab Americans in their thousands
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