Finance and Psychology – A never-ending love story?!

Inhaltsverzeichnis (Table of Contents)

• 1 INTRODUCTION
• 1.1 Background
• 1.2 Research Question
• 1.3 Structure
• 2 LITERATURE REVIEW
• 2.1 Efficient Market Hypothesis
• 2.2 Behavioural Finance
• 2.3 From Expected Utility Theory to Prospect Theory
• 2.4 General Analysis Methods
• 2.4.1 Technical Analysis
• 2.4.2 Fundamental Analysis
• 2.5 Rational versus Irrational Investors
• 2.6 The Limits of Arbitrage
• 2.7 Principal-Agent Problems
• 3 METHODOLOGY
• 4 ANALYSIS OF BEHAVIOURAL PATTERNS
• 4.1 Confirmation Bias
• 4.2 Conservatism Bias
• 4.3 Overconfidence
• 4.4 Mental Accounting
• 4.5 Representativeness
• 4.6 Anchoring
• 4.7 Herding and Stock Market Recommendations
• 5 EMPIRICAL EVIDENCE OF BEHAVIOURAL PATTERNS
• 5.1 Evaluation of Experiment
• 5.2 General Discussion of Behavioral Patterns

Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)

This dissertation investigates the extent to which behavioral finance influences investors' and traders' decision-making processes. It aims to answer the following questions: "To what extent does behavioral finance influence traders' and investors' decision-making processes?" and "Does the traders' and investors' herding behaviour to follow analyst's stock recommendations still hold in the financial crisis?"

• Efficient Market Hypothesis versus Behavioural Finance
• Influence of psychological factors on investment decisions
• Impact of behavioral patterns on market efficiency
• Role of technical and fundamental analysis in investment decision-making
• Herding behavior and its effect on market volatility and price bubbles

Zusammenfassung der Kapitel (Chapter Summaries)

Chapter 2 introduces the Efficient Market Hypothesis (EMH) and contrasts it with behavioral finance. It explores the limitations of the EMH and discusses how psychological factors can lead to market inefficiencies. The chapter then examines the transition from Expected Utility Theory to Prospect Theory, outlining the key differences and implications for decision-making under risk. The chapter concludes with a discussion of technical and fundamental analysis, highlighting their strengths and weaknesses in predicting market movements. Finally, it contrasts rational traders or arbitrageurs with irrational traders or noise traders, analyzing their impact on market efficiency and liquidity.

Chapter 3 outlines the methodology employed in the dissertation, combining both qualitative and quantitative research methods. It explains the epistemological and ontological assumptions underlying the research approach and discusses the sources and methods used to gather information for the literature review. This chapter also highlights the deductive and inductive strategies employed in the analysis of behavioral patterns and the herding behavior.

Chapter 4 identifies and analyzes seven key behavioral patterns that influence traders' and investors' decision-making processes: confirmation bias, conservatism bias, overconfidence, mental accounting, representativeness, anchoring, and herding. It delves into each pattern, explaining its characteristics, potential impact on decision-making, and relevant empirical evidence from existing research.

Chapter 5 presents empirical evidence of the identified behavioral patterns through an experiment and an informal interview with a sophisticated Austrian trader. The experiment analyzes the herding behavior of investors in the context of the 2008 financial crisis and its recovery. The interview provides qualitative insights into the practical manifestation of behavioral patterns in real-world trading decisions.

Schlüsselwörter (Keywords)

This dissertation explores the field of behavioral finance, focusing on the impact of psychological factors on investors' and traders' decision-making processes. Key themes include the Efficient Market Hypothesis, Prospect Theory, technical and fundamental analysis, rational and irrational investors, behavioral patterns such as confirmation bias, overconfidence, mental accounting, and herding, market inefficiencies, and price bubbles.