An Investigation of the “Flash Crash” of 2010 using the principles of behavioral finance

Table of Contents

CHAPTER 1: INTRODUCTION

STRUCTURE OF THE PAPER

CHAPTER 2: LITERATURE REVIEW

BEHAVIORAL FINANCE

MAJOR LITERATURE

STATUS QUO BIAS

TRANSITORY COMPONENTS

UTILITY HYPOTHESIS IS QUESTIONED

GENDER AS A FACTOR IN DECISION MAKING

BEHAVIOR OF INDIVIDUAL INVESTORS

FEEDBACK THEORIES

TWO TYPES OF INVESTORS: SMART MONEY VS. ORDINARY INVESTORS

THE NEED FOR BEHAVIORAL FINANCE

EVENTS LEADING UP TO THE CRASH

FLASH CRASH 2010: A BRIEF SUMMARY

NET RESULT OF FLASH CRASH

CHAPTER 3: RESEARCH QUESTION AND FRAMEWORK

RESEARCH QUESTIONS

QUESTION 1: WHICH THEORIES EXPLAIN THE FLASH CRASH?

QUESTION 2: WHICH COMPANIES?

QUESTION 3: CIRCUITBREAKERS

CHAPTER 4: RESEARCH METHODOLOGY

OBJECTIVE OF THE RESEARCH

RESEARCH PROTOCOL

HOW RESEARCH QUESTIONS WERE ANSWERED?

STRENGTH OF ASSOCIATION

MATERIALS USED

HOW MATERIALS WERE PREPARED

DATA COLLECTION

TYPES OF DATA

JUSTIFICATION OF STUDY’S DESIGN

ESTABLISHING RIGOR

CHAPTER 5: ANALYSIS OF REASONS FOR FLASH CRASH 2010

LARGE DIRECTIONAL BETTING/TRADING

CHANGES IN MARKET STRUCTURE RESULTING IN THE DECENTRALIZATION OF TRADING

INFLUENCE OF HFT

HERD MENTALITY

HIGH FREQUENCY TRADERS AND THEIR CONTRIBUTION

ORDER FLOW TOXICITY METRIC

TECHNOLOGICAL GLITCHES

CHAPTER 6: INTERPRETATION OF RESULTS

CAN PROPOSED REASONS ADEQUATELY EXPLAIN EVENT

HOW DO THESE POSSIBLE EXPLANATIONS DIFFER FORM TRADITIONAL FINANCE EXPLANATIONS

CHAPTER 7: CONCLUSION

LESSONS LEARNED

CAN FINANCIAL INSTRUMENTS/REGULATIONS PREVENT FUTURE CRISIS?

CIRCUIT BREAKERS

RECOMMENDATIONS

FUTURE RESEARCH

Objectives and Research Focus

The primary objective of this dissertation is to investigate the "Flash Crash" of 2010 through the lens of behavioral finance, seeking to explain this seemingly irrational market anomaly by analyzing human-driven factors rather than relying solely on traditional economic models.

• Analysis of behavioral finance theories (e.g., herd mentality, overconfidence) in the context of market crashes.
• Evaluation of the influence of high-frequency trading (HFT) and large directional betting on market stability.
• Investigation of psychological triggers and feedback loops during rapid market downturns.
• Assessment of regulatory responses and the efficacy of "circuit breakers" as preventative measures.

Excerpt from the Book

Summary of Chapters

CHAPTER 1: INTRODUCTION: This chapter introduces the "Flash Crash" as a market anomaly and outlines how behavioral finance can provide deeper insights into the event than traditional finance.

CHAPTER 2: LITERATURE REVIEW: This chapter provides a theoretical foundation, exploring key concepts like status quo bias, feedback theories, and the distinction between smart money and ordinary investors.

CHAPTER 3: RESEARCH QUESTION AND FRAMEWORK: This section defines the primary research questions, focusing on the psychological aspects and the potential for regulatory safety mechanisms.

CHAPTER 4: RESEARCH METHODOLOGY: This chapter describes the qualitative and triangulation-based approach used to analyze the event, including the use of expert interviews and secondary data.

CHAPTER 5: ANALYSIS OF REASONS FOR FLASH CRASH 2010: This chapter presents the various factors posited to have caused the crash, ranging from directional betting and HFT to technological glitches.

CHAPTER 6: INTERPRETATION OF RESULTS: This chapter evaluates the proposed causes using behavioral finance theories to determine their credibility and impact on the 2010 market event.

CHAPTER 7: CONCLUSION: This chapter summarizes findings, discusses lessons learned, and offers recommendations for future market stability, including the implementation of circuit breakers.

Keywords

Behavioral finance, Flash Crash 2010, high-frequency trading, market anomaly, investor behavior, herd mentality, feedback loops, circuit breakers, market volatility, rational decision-making, financial regulation, algorithmic trading, stock market, investment psychology, economic crisis.

Frequently Asked Questions

What is the primary focus of this research?

The dissertation focuses on the "Flash Crash" of 2010, investigating it through the perspective of behavioral finance to understand why traditional financial models failed to account for this sudden market event.

What are the central themes of the study?

The core themes include the role of mass psychology in trading, the impact of high-frequency trading (HFT) algorithms, the influence of directional betting, and the necessity of improved market regulations.

What is the main research objective?

The objective is to determine the underlying factors of the 2010 crash and analyze how behavioral economic theories can help explain the seemingly irrational behavior of investors and automated systems during the event.

Which scientific methodology is applied?

The research uses a qualitative, triangulation-based approach, combining extensive secondary source analysis (academic journals, SEC reports) with firsthand perspectives obtained from expert interviews.

What does the main body of the paper cover?

The main body examines behavioral finance theories, reviews the timeline and causes of the Flash Crash, and provides a critical analysis of factors like herd mentality and technological failures in computer-trading systems.

How is the paper characterized by keywords?

The research is defined by terms such as behavioral finance, market anomalies, herd mentality, HFT, and investor psychology, reflecting its focus on the non-traditional side of market economics.

How does the author define the "disposition effect" in this context?

The author discusses this as a behavioral tendency where individual investors sell winning stocks too early while holding onto losing investments, often influenced by past return performance and limited attention.

What is the conclusion regarding regulatory "circuit breakers"?

The research concludes that while circuit breakers are a necessary tool to prevent future catastrophic sell-offs, they must be implemented carefully to avoid unintended consequences in market liquidity and informational transparency.