‘Home Bias’ Phenomenon Challenge the View That Investors Are Rational

To further my understanding of the financial world, I arranged work experience with Tideway Investment in London. At first sight this appeared to be a surreal world where moving money around creates more money. I began to learn more about the realities of valuing companies and stock. This

The behaviour of markets and investors, the decision making in the market place and the dynamics of demand and supply in any given market cannot be determined with a hundred percent accuracy. However master minds in the past have designed various techniques and theories that help investors make a particular buying decision, or to make choices logically. These theories and techniques help today’s investors to peep into the future and make almost immaculate predictions regarding the future behaviour of the market and the ongoing trends. A lay man night view the decision making of an investor as being solely based upon speculation but in reality every move that an investor makes today in the market place is backed up by sound calculation and

As Chapter 10 questions, if further evidence continues to surface that capital markets do not always behave in accordance with the efficient market hypothesis, then should we reject the research that has embraced the EMH as a fundamental assumption? In this regard we can return to earlier chapters of this book in which we emphasised that theories are abstractions of reality. Capital markets are made of individuals and as such it would not (or perhaps, should not) be surprising to find that the

Investing behavior should be driven by information, analysis, and self-discipline, not by emotion or ‘hunch.’

Financial Assets: Robert Shiller, a Noble Prize winner in Economics, has the belief that our cultural and psychological thoughts influence our financial behavior. Shiller highlights the key factors of the irrational exuberance that exists in the financial market. In his book, Irrational Exuberance, he argues that investors often make irrational decisions. Throughout the book, he explains that there are twelve factors that impact the market behavior from 1995 to 2005 and that eventually led to a financial bubble. Some of these factors can be linked to the Black Thursday of 1929.

Moreover, it deals with the immediate opening problem of the case: the market’s response to the PacifiCorp announcement. Finally, it should help to motivate a discussion of Buffett’s investment philosophy.

It was previously assumed that economic investors and regulators (agents) utilised all available information and thus market prices were a reflection of this information with assets representing their fundamental value, encouraging the position that agents’ actions were rational. The 2007-2008 Global Financial Crisis (GFC) is posited to have originated from the notion that all available information was utilised, causing agents to fail to thoroughly investigate and confirm “the true values of publicly traded securities,” leading to a failure to register the presence of an asset price bubble preceding the GFC (Ball 2009).

However, Housing plays different roles in the different household portfolio selection models, some of them consider housing as the consumer goods, and others think housing as a large investment. Brueckner (1997) argues that the housing investment is inefficient based on the mean-variance sense. Arrondel and Lefebvre (2001) illustrate that the probability of housing investment shows an inverted U shaped, which can

investors are rational and risk averse, meaning they will always value securities with higher returns than securities with lower returns.

The year 2008 was a horrendous year for most, in terms of money. The housing bubble deflated and the steep drop in prices sent both institutional investors and average investors into financial turmoil. There is quite a bit of controversy as what actually caused the housing bubble, but in this essay we will be using the explanation given by John C. Coffee Jr. Here he identified various factors that worked in tandem to subsequently cause the financial crisis of 2008. The first was the systematic failure by what he termed a “gatekeeper.” Which he later defines as financial institutions that provides verification for investors. In this instance the gatekeeper was the credit agencies who failed to appraise the actual value of the mortgaged backed

Alternatively, an opposing school of theory headed up by M.H. Miller and F. Modigliani (1958) believe that dividend policy is ‘irrelevant’ and argue that the value of the firm is solely determined by the returns from its projects based on their investment policy. They believe that given a frictionless market where no transactions costs and no barriers exist to the free flow of information dividend policy has no effect on either the price of a company’s stock nor its cost of capital. This is supported by Al-Malkawi who states that shareholders wealth is not affected by the dividend decision and therefore they would be indifferent between dividends and capital gains.2 The reason for their indifference is that shareholder wealth is affected by the income generated by the investment decisions a firm makes, not by how it distributes that income.

This book discusses speculation and how it has shaped the western world. The book spans from the Romans to Modern day but in keeping with the theme of this course observations will be restricted to the pre 1900 section as much as possible. The book focuses on western economies as the Asian world considers the whole stock trading for profit as being ruinous to a healthy economy. Individual profit taking does not contribute to the wealth of the community. Oddly modern Japan is viewed as a western culture and its economic woes of the late 80s is a sign that that it fell afoul of the demons of western capitalistic greed. (my portfolio is like a

Herding is an everyday phenomenon from personal to financial contexts. The focus of this paper is to explore the theory of herding, namely Compensation Based Herding (CBH) and its effect on financial markets. The report aims to explain herding, assess the advantages and disadvantages of CBH incorporating the 2008 financial crisis, and explore the possibility that CBH may have no effect on the financial markets.

Despite the described superiority of the myopic loss aversion model to explain the equity premium puzzle, some of the economists still argue the ability of this model to resolve this phenomenon. Berkelaar and Kouwenberg explain their disagreement by the notion of the break-even effect.

This paper is provided as an analysis between the relationship of emotions and investment. Specifically, there will be an emphasis on the feelings, self-control, and how our decision making play a role in investing. This paper will also include a detailed summary of the emotional states of misattribution bias, positive and negative emotions, pessimism and optimism. Lastly, this paper will contain an explanation of how this behavior influences investing, and how to alleviate this comportment through self-control.