The Consequences Of Herding Behavior Of Financial Traders

Professional stock traders deal make dozens of instant decisions daily. They don’t have time to deliberate every buying and selling decisions because making a complex decision could take such a long period of time and expend so much thinking effort that the opportunity could pass before the trader makes his mind up. What they do have, however, is the habit of good trading. Million dollar traders can bring much more profit than mediocre ones because they develop good routines through training and experience. Mediocre traders respond to market signals by animal instinct, easily affected by emotions. The biggest enemy of

This phenomenon was first identified by Gilfillan in 1935, and he named it “sailing ship effect”. It describes the way, how even though existing players on the market are often aware of approaching discontinuities, they still pursue with their current trajectories with success in the short term.

Results showed the herding effect of followers listening to Jim Cramer’s buying suggestions from the first

The dynamics of today’s constantly evolving world, drawn together by increasingly intertwined economies and global markets has always intrigued me, ever since I was a young undergraduate. What fascinated me most about economics was the effort to mathematically model this dynamic driven in part by human behavior and social tendencies. During my undergraduate study, I got an opportunity to explore various facets of global markets and got a chance to work on several academic projects to empirically model economic theories. At the same time, I received the opportunity to intern at Ernst and Young Financial Services, where I realized the vast potential of empirical asset pricing and financial modeling. I realized the power of advanced data

This financial theory was best defined in the 1970s by Eugene Fama in his article ‘Efficient Capital Markets: A Review of Theory and Empirical Work’. In this article Eugene declared that no one could “beat the markets” as a result of all current stock prices being unpredictable since they quickly reflect all information about the stock as it becomes available and the potential prices of stock are also unpredictable as it is dependent on all future information, which is not currently available. Therefore, investors are unable to use technical or fundamental analysis to achieve above-average returns.

The End of Behavioral Finance Author(s): Richard H. Thaler Source: Financial Analysts Journal, Vol. 55, No. 6, Behavioral Finance (Nov. - Dec., 1999), pp. 12-17 Published by: CFA Institute Stable URL: http://www.jstor.org/stable/4480205 Accessed: 17/04/2009 10:10

There is a fierce debate on whether stock market is efficient all these years. Some people advocated Fama’s research in 1960s, and they believe that the Efficient Markets Hypothesis has been well established. However, others do not agree with. They found some evidence to prove market inefficient by empirical researches. This essay mainly focuses on the Efficient Markets Hypothesis, and there are six parts to discuss. Firstly, it will compare the random walk theory and the weak-form of the Efficient Markets Hypothesis; Secondly, it will choose two empirical studies against the weak-form of the Efficient Markets Hypothesis; Thirdly, it will assess the semi-strong form with the weak-form the Efficient Markets Hypothesis; Fourthly, it will evaluate the semi-strong form of the Efficient Markets Hypothesis by two of empirical studies; Fifthly, it will identify the contrast between the strong form of the Efficient Markets Hypothesis with both weak form and semi-strong form; Last but not least, it will use one empirical study to judge the strong form.

Social behaviours, on the other hand seem to tend the consumers to buy a product out of their self-consideration since they are conditioned not to flaunt any social misery regarding a particular product.

Since 1999, the economy has been in a downward trend. The majority of people who had invested in the stock market now known as the great stock bubble or fraud bubble were given a false sense of security and they felt the market would just keep climbing. Were there signs that investors could have looked for to predict the economic downturn? If investors had looked for the signs, maybe they could have changed their direction of investment. This paper will investigate the characteristics of bonds and see if the bond market has proven to be a safe haven for those who were wise enough to invest in it. When the economy is in a downward trend why should more people invest in bonds?

From 1990 to 2010 several factors contributed to the volatility of stock trading. The housing booms of the late 1980’s, late 1990’s and early 2000’s demonstrated that an inelasticity in housing supply coupled with a large increase in technologies and securities stock trading creates an unstable market which results in a housing bubble collapse (Calabria, 2011, p. 556). Second, the introduction of the internet resulted in 24-hour trading opportunities with open to open pricing often reflecting much more volatile price deviation than close to close pricing, which had remained a neutral

Being that news and exogenous shocks are by nature erratic, prices will share their randomness. Accordingly, as stipulated by the rational expectations model, investors will act in response to financial shocks mindful of the latters’ macroeconomic consequences. Furthermore, both efficiency and rationality have relative connotations within the economy and are contingent to different levels of market friction. Campbell, Lo, and MacKinley echo this view and argue that the concept of relativity is a more useful approach than the absolutist interpretations seen in traditional economic literature. Markets can, thus, still be efficient even if certain economic agents are irrational or if price volatility of assets cannot be grounded by fundamentals. Since certain market participants are irrational, specific stock market trades will not be based on a rational evaluation. Yet, Fama’s sophisticated trader argument finds that the impact of the rational agents within the market is powerful enough to minimize the departure of actual prices from their fundamental value. Fama expanded EMH into three distinct forms- weak, semi-strong and strong form- to allow the hypothesis to be tested in financial analyses. The form that is perceived, however, as the most reflective of EMH and will be employed by the paper is the semi-strong. This form of market efficiency

Behavioural economics helps to explain that assumptions which have been taken are not always borne out. It’s related to physiology, economics and other related disciplines to demonstrate that what actually people thing and what are their expectations in the future if changes happen. The findings of behavioural economics have organized in a variety of ways. When in the time of decision making as content between two system people are likely to rely on first system which leads to a predictable deviations from the expectations of standard economic theory.

2002). Barberis & Shleifer (2003) argue that the tendency of patrons to heuristically categories gadgets will cause the emergence of styled-based mutual funds. Doukas & Petmezas (2005) realize guide for self-attribution hypothesis within the marketplace for company manipulate.

Throughout the history of finance mankind has devised various ways to predict future costs, price changes, changes in supply and demand, and changes to bond and stock prices. We’ve created sophisticated models and formulas to help us make financial decisions. Although, we can’t always prepare for the inevitable depression, inflation, stock bubble bursts, long or short term shocks to the economy, and changes in taste, we can try our best to protect ourselves financially from our own irrational behavior and decisions when it comes to finance. With our sophisticated technology shouldn’t everyone generally come to the same conclusion when it comes to changes in the stock or bond market? What causes people to act differently to

According to Kay (2013), there are three reasons why investors fail. Firstly, they fail because they are too easily convinced by what they hear or read. Secondly, they are strongly attached to their beliefs. Lastly, investors fail to make a good decision due to the lack of knowledge and experience. Ideally, investors should use their judgment and contemplate all relevant information in an impartial manner without being influenced by any desire outcome. Still, it is easier to say than done because prior researches in psychology indicate that preferences can definitely sway the way people process information and make judgement in order for it to be consistent with what they believe (Ditto and Lopez, 1992; Ditto et al., 1998; Kunda, 1990). Investors tend to have some initial beliefs or preferences on their mind before making judgments thereby creating a strong motivation to reach a particular conclusion. If investors have set their minds into something, those preferences may affect their logical thinking. Investors will keep a hold of their preferences, which may lead them to make judgment that are not in their own best interest, even though reliable evidences suggest otherwise. This is called motivated reasoning which refers to an active process of construction in which individuals unconsciously tend to fit their organising and processing of information to conclusions that they desire to see which suits their goals (Balcetis et al., 2014). Since we realised that