The study of behavioral financial effect on individual investment

Abstract

Behavioral finance is a study of the markets that draws on psychology, throwing more light on why people buy or sell the stocks and even why they do not buy stocks at all. This research on Investor behavior helps to explain the various ‘market anomalies’ that challenge standard theory. This is because this anomaly is persistent. Therefore, this behavior exists. Behavioral finance models often rely on a concept of individual investors who are prone to judgment and decision-making errors. There are relatively low-cost measures to help investors make better choices and make the market more efficient. These involve regulations, investment education, and perhaps some efforts to standardize mutual Fund advertising. Moreover, a case can be making for regulations to protect foolish investors by restricting their freedom of action of these that may prey upon them. In west economy literature, human entity is defined as a rational creature which decides under fully clear conditions. This perfect creature which is often referred as economic human is always successful on optimizing his interests and gathers all information which is influential in his options and decisions and creates an ideal opportunity which is not found in real world of many investors. Important aspects of rationality factors include maximizing expected means and Bayesian learning, when investors diagnose behavioral and conceptual errors related o decision making they can do better in their decision making. Understanding these cases help investors to design an optimized investment strategy and reach their purposes. In traditional financial theory, it is assumed that agents are rational and a stable price is presented. Important aspects of rationality factors include maximizing expected means and Bayesian learning. From market view, traditional financial theory is based on unit price rule which states that stocks have the same price with this final result. Financial behavior is a theory which describes financial problems using cognitive psychological theories. This theory not only questions modern financial theories like efficient markets but also has doubts about maximizing and rationality expectations.