What are the most common errors made by investors?
What are the causes behind market inefficiencies?
Behavioural Finance is that branch of economic studies that investigates financial markets behaviours in relation to society and single individuals’ behaviour patterns.
Behavioural finance studies the behaviour of markets, investors and firms using approaches adapted from psychology. It offers new ways to think about many fundamental areas of finance – such as asset bubbles, stock market fluctuations, portfolio choice, security issuance and mergers and acquisitions. Markets may experience inefficiencies or mispricings which could reflect irrationality of some investors – thus offering opportunities for rational investors to “correct” prices. However behavioural finance posits that there are limits to such arbitrage opportunities. A focus of behavioural finance is understanding, modelling and applying individuals’ “less than rational” beliefs and preferences – building upon theories of judgement and decision making.
Questions our researchers have explored include:
How does a dynamic model of Prospect theory explain the Disposition Effect?
What are the implications of wide framing on the Disposition Effect?
How do randomized strategies alter the implications of dynamic Prospect Theory?
How can we empirically test regret theory using financial trading data?
Do stock-level experienced returns affect security selection?
Is there a link between tourism and the home-bias?
Researchers are from Statistics, WBS (Finance), WBS (Behavioural Science) and Economics.
- 'Make hay while the sun shines: An empirical study of maximum price, regret and trading decisions' Authors: Julia Brettschneider, Giovanni Burro, 2020
Journal: Social Science Research Network (SSRN) working paper
- 'Randomized Strategies and Prospect Theory in a Dynamic Context'
Vicky Henderson, David Hobson and Alex.S.L. Tse, 2017
Journal: Journal of Economic Theory, 168, 287-300.
- 'Probability Weighting, Stop-Loss and the Disposition Effect'
Vicky Henderson, David Hobson and Alex.S.L. Tse, 2018
Journal: Journal of Economic Theory, 178, 360-397.