The Behavioral Finance Paradigm And Its Derived Explanations Of Stock Market Bubbles And Crashes

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M11EFA BEHAVIOURAL FINANCE COURSEWORK Name: Thi Thanh Van Mai Student ID: 6026628 What contribution can behavioural finance make to the explanation of stock market bubbles and crashes? Table of Contents I. Introduction 3 II. The behavioral finance paradigm and its derived explanations of the investors’ beliefs 3 III. Behavioral Theories used in the finance markets 4 IV. Empirical Evidences in the stock markets 6 V. Conclusion 7 VI. References 8 I. Introduction There have been a number of models in the traditional finance paradigm which have the common assumption that the investors would act rationally and consider all sources of information in their marking or investing decisions. That would also lead to…show more content…
In this trend, there are several models to support this view of these investors, including the Modern Portfolio Theory (MPT), Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) (Fama and French, 2004; Perold, 2004). They have been the main instruments that the rational expectation based theories have been deploying. However, this traditional paradigm has been analyzed by a number of researches that the information should not be considered to have a very important role in affecting investors (Miles and McCue, 1984), Titman and Warga (1986), Lusht (1988) and Liu and Mei (1992). II. The behavioral finance paradigm and its derived explanations of the investors’ beliefs This was also the driving dynamic for the behavioral finance paradigm, which has the origin from the above challenges that the traditional paradigm has had. From its viewpoint, the investments that are made used to be made irrationality. Besides, this paradigm also made attempts to explore into the investment market phenomena by proposing the two doctrines that the agents have been failed to update their beliefs correctly, and that there is the typical deviation from the ordinary process of making choices of investments of the investors (De Long, Shleifer, Summers and Waldmann, 1990; Froot and Obstfeld, 1991). In other words, from the viewpoint of the behavioral finance paradigm, these two are the main causes of the stock
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