Foundations of Behavioural Finance II

The chapter consists of several aspects of behavioural finance and its foundations such as; Overconfidence is the tendency for people to overestimate their knowledge, abilities, and the precision of their information, or to be overly sanguine (optimistic) of the future and their ability to control it. It is found that most people most of the time are overconfident is well documented by researchers in the psychology literature. Overconfidence comes in different forms one of them is miscalibration, the tendency to believe that your knowledge is more precise (accuracy) than it really is. Prospect theory assumes that losses and gains are valued differently, and thus individuals make decisions based on perceived gains instead of perceived losses. Also known as the "loss-aversion" theory, the general concept is that if two choices are put before an individual, both equal, with one presented in terms of potential gains and the other in terms of possible losses, the former option will be chosen. Emotion is a complex, subjective experience accompanied by biological and behavioral changes. Emotion involves feeling, thinking, activation of the nervous system, physiological changes, and behavioral changes such as facial expressions. There are many different types of emotions that have an influence on how we live and interact with others. At times, it may seem like we are ruled by these emotions. The choices we make, the actions we take, and the perceptions we have are all influenced by the emotions we are experiencing at any given moment. The adaptive market hypothesis (AMH) is an alternative economic theory that combines principles of the well-known and often controversial efficient market hypothesis (EMH) with behavioral finance. It was introduced to the world in 2004 by Massachusetts Institute of Technology (MIT) professor Andrew Lo.Lire moins