Indian Journal of Research in Capital Markets

Open Access Open Access  Restricted Access Subscription Access

Behavioral Finance - An Emerging Theory : A Review Study


Affiliations
1 PhD Research Scholar, Department of Commerce, University of Kashmir, Hazaratbal - 190 006, Srinagar, Jammu & Kashmir, India
2 PhD Research Scholar, Department of Management, Islamic University of Science and Technology, 1-University Avenue, Awantipora, Pulwama - 192 122, Jammu & Kashmir, India
3 Professor, Department of Commerce, University of Kashmir, Hazaratbal - 190 006, Srinagar, Jammu & Kashmir, India

   Subscribe/Renew Journal


Purpose : This paper debated market efficiency and asset pricing through an extensive review of literature in favor as well as against the well-known efficient market hypothesis (EMH). The purpose of this paper is to provide a comprehensive literature review of behavioral finance to label it as an alternate theory of asset pricing.

Methodology/Design/Approach : In this paper, the literature review is divided into three parts. Part-1 provides a review of EHM, its dominance, and downfall. Part-2 discusses the rise of behavioral finance as an alternate theory, and part-3 discusses the influencing factors of investment behavior. Three criteria were set for the selection of the articles. First, only relevant and most articles published from 2000 – 2022 were selected, and second, the most important articles published before 2000 were also included. Third, only those articles were selected that were published in the English language.

Findings : Comprehensive literature review in this paper helped in solving the market efficiency problems. It shows how the concepts of market efficiency and rationality were challenged by the new field of a discipline known as behavioral finance. Through further discussion on behavioral finance, this paper points out many gaps and also suggests how to bridge them.

Originality/Value : This is an extensive study that not only discusses the rationality approach of asset pricing through EMH, but also discusses behavioral finance and its relevance to asset pricing. This study can assist the researchers to focus more on behavioral finance and explore more determining factors of the investment behavior of the investors.


Keywords

efficient market hypothesis, behavioral finance, behavioral biases, personality, emotions

JEL Classification Codes : G10, G11, G40, G41

User
Subscription Login to verify subscription
Notifications
Font Size

  • Agrawal, D., Singhal, T., & Santi Swarup, K. (2016). Role of herding behavior in influencing investor decision making in India. Indian Journal of Research in Capital Markets, 3(4), 43–48. https://indianjournalofcapitalmarkets.com/index.php/ijrcm/article/view/109301

  • Anwar, M., & Kumar, S. (2018). CAPM - Empirical evidence from the Indian Stock Market. Indian Journal of Research in Capital Markets, 5(4), 38–52. http://doi.org/10.17010/ijrcm/2018/v5/i4/141546

  • Aren, S., & Nayman Hamamcı, H. (2022). The impact of financial defence mechanisms and phantasy on risky investment intention. Kybernetes, 51(1), 141–164. http://doi.org/10.1108/K-10-2020-0695

  • Athira, K., & Kakkakunnan, M. K. (2020). Impact of demographic traits and personality traits of investors on their risk-bearing capacity: A study with special reference to investors of Kerala. Indian Journal of Finance and Banking, 4(2), 64–78. https://doi.org/10.46281/ijfb.v4i2.737

  • Banz, R. W. (1981). The relationship between return and market value of common stocks. Journal of Financial Economics, 9(1), 3–18. https://doi.org/10.1016/0304-405X(81)90018-0

  • Barba, H. N. (2005). Songwriting and self discovery: A heuristic study grounded in the arts and supported by the theories of Carl Jung and James Hillman. Union Institute and University.https://www.proquest.com/openview/7ef2cf07f3b657ee7e7db806988c28ce/1?pq-origsite=gscholar&cbl=18750&diss=y

  • Barberis, N. C. (2013). Thirty years of prospect theory in economics: A review and assessment. Journal of Economic Perspectives, 27(1), 173–196. https://doi.org/10.1257/jep.27.1.173

  • Barberis, N., & Thaler, R. (2003). Chapter 18: A survey of behavioral finance. In, Handbook of the economics of finance (Volume 1, Part B), 1053–1128. https://doi.org/10.1016/S1574-0102(03)01027-6

  • Blajer-Gołębiewska, A., Wach, D., & Kos, M. (2018). Financial risk information avoidance. Economic Research - Ekonomska Istraživanja, 31(1), 521–536. https://doi.org/10.1080/1331677X.2018.1439396

  • Brown, S., & Taylor, K. (2014). Household finances and the ‘Big Five’ personality traits. Journal of Economic Psychology, 45, 197–212. https://doi.org/10.1016/j.joep.2014.10.006

  • Chapman, G. B., & Johnson, E. J. (2002). Incorporating the irrelevant: Anchors in judgments of belief and value. In, T. Gilovich, D. Griffin, & D. Kahneman (eds.), Heuristics and biases: The psychology of intuitive judgment (pp. 120–138). Cambridge University Press. https://doi.org/10.1017/CBO9780511808098.008

  • Cuomo, M. T., Tortora, D., Mazzucchelli, A., Festa, G., Di Gregorio, A., & Metallo, G. (2018). Impacts of code of ethics on financial performance in the Italian listed companies of bank sector. Journal of Business Accounting and Finance Perspectives, 1(1), 157–179. https://doi.org/10.26870/jbafp.2018.01.005

  • Dangi, M., & Kohli, B. (2018). Role of behavioral biases in investment decisions : A factor analysis. Indian Journal of Finance, 12(3), 43–57. https://doi.org/10.17010/ijf/2018/v12i3/121997

  • Degutis, A., & Novickytė, L. (2014). The efficient market hypothesis: A critical review of literature and methodology. Ekonomika, 93(2), 7–23. https://doi.org/10.15388/Ekon.2014.2.3549

  • Dhankar, R. S., & Shankar, D. (2016). Relevance and evolution of adaptive markets hypothesis: A review. Journal of Indian Business Research, 8(3), 166–179. https://doi.org/10.1108/JIBR-12-2015-0125

  • Dhiman, B., & Raheja, S. (2018). Do personality traits and emotional intelligence of investors determine their risk tolerance? Management and Labour Studies, 43(1–2), 88–99. https://doi.org/10.1177/0258042X17745184

  • Durand, R. B., Newby, R., & Sanghani, J. (2008). An intimate portrait of the individual investor. Journal of Behavioral Finance, 9(4), 193–208. https://doi.org/10.1080/15427560802341020

  • Duxbury, D. (2015). Behavioral finance: Insights from experiments II: Biases, moods and emotions. Review of Behavioral Finance, 7(2), 151–175. https://doi.org/10.1108/RBF-09- 2015-0037

  • Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383–417. http://www.jstor.com/stable/2325486

  • Fama, E. F., & French, K. R. (1996). Multifactor explanations of asset pricing anomalies. The Journal of Finance, 51(1), 55–84. https://doi.org/10.1111/j.1540-6261.1996.tb05202.x

  • Fama, E. F., & French, K. R. (1997). Industry costs of equity. Journal of Financial Economics, 43(2), 153–193. https://doi.org/10.1016/S0304-405X(96)00896-3

  • Gordon, M. J. (1962). The investment, financing, and valuation of the corporation. RD Irwin.

  • Gupta, S., & Shrivastava, M. (2021). Impact of behavioral biases on investment decisions: Moderating effect of preferred sector of investment. Ramanujan International Journal of Business and Research, 6, 37–48. https://doi.org/10.51245/rijbr.v6i1.2021.244

  • Hachana, R., Berraies, S., & Ftiti, Z. (2018). Identifying personality traits associated with entrepreneurial success: Does gender matter? Journal of Innovation Economics & Management, 27(3), 169–193. https://doi.org/10.3917/jie.027.0169

  • Howard, C. T. (2014). Behavioral portfolio management. Journal of Behavioral Finance & Economics, 1–37.

  • Isidore, R., & Christie, P. (2017). Correlation between behavioural biases and investors’ personality in the secondary equity market in Chennai. International Journal of Applied Financial Management Perspective, 6(2), 1–7. https://www.researchgate.net/publication/319328227

  • Jamshidinavid, B., & Amiri, S. (2012). The impact of demographic and psychological characteristics on the investment prejudices in Tehran Stock. European Journal of Business and Social Sciences, 1(5), 41–53. http://www.ejbss.com/recent.aspx

  • Jegadeesh, N., & Titman, S. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency. The Journal of Finance, 48(1), 65–91. https://www.jstor.org/stable/2328882

  • Jensen, M. C. (1978). Some anomalous evidence regarding market efficiency. Journal of Financial Economics, 6(2–3), 95–101. https://doi.org/10.1016/0304-405X(78)90025-9

  • Kahneman, D., & Riepe, M. W. (1998). Aspects of investor psychology. Journal of Portfolio Management, 24(4), 52–65. https://obj.portfolioconstructionforum.edu.au/articles_perspectives/Portfolio-Construction-Forum_Kahneman_Aspects-of-investor-psychology.pdf

  • Kahneman, D., & Tversky, A. (1979). On the interpretation of intuitive probability: A reply to Jonathan Cohen. Cognition, 7(4), 409–411. https://doi.org/10.1016/0010-0277(79)90024-6

  • Kemp, A. G., & Reid, G. C. (1971). The random walk hypothesis and the recent behaviour of equity prices in Britain. Economica, 38(149), 28–51. https://www.jstor.org/stable/2551749

  • Keynes, J. M. (1923). A reply to Sir William Beveridge. The Economic Journal, 33(132), 476–486. https://www.jstor.org/stable/2222885

  • Kumar, R., Saha, R., Sekar, P. C., & Dahiya, R. (2019). Examining the role of external factors in influencing green behaviour among young Indian consumers. Young Consumers, 20(4), 380–398. https://doi.org/10.1108/YC-12-2018-0921

  • LeRoy, S. F., & Porter, R. D. (1981). The present-value relation: Tests based on implied variance bounds. Econometrica, 49(3), 555–574. https://www.jstor.org/stable/1911512

  • Lintner, J. (1975). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. In, Stochastic optimization models in finance (pp. 131–155). Academic Press. https://doi.org/10.1016/B978-0-12-780850-5.50018-6

  • Lucey, B. M., & Dowling, M. (2005). The role of feelings in investor decision-making. Journal of Economic Surveys, 19(2), 211–237. https://doi.org/10.1111/j.0950-0804.2005.00245.x

  • Malkiel, B. G. (2003). The efficient market hypothesis and its critics. Journal of Economic Perspectives, 17(1), 59–82. https://doi.org/10.1257/089533003321164958

  • Malkiel, B. G. (2005). Reflections on the efficient market hypothesis: 30 years later. The Financial Review, 40(1), 1–9. https://doi.org/10.1111/j.0732-8516.2005.00090.x

  • Mathur, G., & Nathani, N. (2019). Personality traits and risk tolerance among young investors. International Journal of Innovative Technology and Exploring Engineering (IJITEE), 8(10), 2019–2023. https://doi.org/10.35940/ijitee.J9312.0881019

  • Müller, J., & Schwieren, C. (2012). Can personality explain what is underlying women’s unwillingness to compete? Journal of Economic Psychology, 33(3), 448–460. https://doi.org/10.1016/j.joep.2011.12.005

  • Nair, V. R., & Antony, A. (2015). Evolutions and challenges of behavioral finance. International Journal of Science and Research (IJSR), 4(3), 1055–1059. https://www.ijsr.net/archive/v4i3/SUB152140.pdf

  • Nicholson, N., Soane, E., Fenton-O'Creevy, M., & Willman, P. (2005). Personality and domain-specific risk taking. Journal of Risk Research, 8(2), 157–176. https://doi.org/10.1080/1366987032000123856

  • Odean, T. (1999). Do investors trade too much? The American Economic Review, 89(5), 1279–1298. https://www.jstor.org/stable/117058

  • Ozer, G., & Mutlu, U. (2019). The effects of personality traits on financial behaviour. Journal of Business Economics and Finance, 8(3), 155–164. https://doi.org/10.17261/Pressacademia.2019.1122

  • Pahuja, A., & Singh, G. (2014). Relevance of efficient market hypothesis with special reference to BSE India. Amity Business Review, 15(1), 168–175.

  • Prabhakar Rajkumar, K., & Lakshmi Kavitha, N. (2017). A study on the influence of stock broker on investor's decision making with special reference to Bombay Stock Exchange. Indian Journal of Research in Capital Markets, 4(2), 25–35. https://doi.org/10.17010/ijrcm/2017/v4/i2/116086

  • Reinganum, M. R. (1981). Misspecification of capital asset pricing: Empirical anomalies based on earnings' yields and market values. Journal of Financial Economics, 9(1), 19–46. https://doi.org/10.1016/0304-405X(81)90019-2

  • Sadi, R., Asl, H. G., Rostami, M. R., Gholipour, A., & Gholipour, F. (2011). Behavioral finance: The explanation of investors’ personality and perceptual biases effects on financial decisions. International Journal of Economics and Finance, 3(5), 234–241. https://doi.org/10.5539/ijef.v3n5p234

  • Saliya, C. A. (2022). Stock market development and nexus of market liquidity: The case of Fiji. International Journal of Finance & Economics, 27(4), 4364–4382. https://doi.org/10.1002/ijfe.2376

  • Sarwar, D., Sarwar, B., Raz, M. A., Khan, H. H., Muhammad, N., Azhar, U., Zaman, N. U., & Kasi, M. K. (2020). Relationship of the big five personality traits and risk aversion with investment intention of individual investors. The Journal of Asian Finance, Economics and Business, 7(12), 819–829. https://doi.org/10.13106/jafeb.2020.vol7.no12.819

  • Saunders, E. M. (1993). Stock prices and Wall Street weather. The American Economic Review, 83(5), 1337–1345. https://www.jstor.org/stable/2117565

  • Sharma, A., & Kumar, A. (2020). A review paper on behavioral finance: Study of emerging trends. Qualitative Research in Financial Markets, 12(2), 137–157. https://doi.org/10.1108/QRFM-06-2017-0050

  • Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425–442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x

  • Shiller, R. J. (2000). Measuring bubble expectations and investor confidence. Journal of Psychology and Financial Markets, 1(1), 49–60. https://doi.org/10.1207/S15327760JPFM0101_05

  • Shiller, R. J. (2003). From efficient markets theory to behavioral finance. Journal of Economic Perspectives, 17(1), 83–104. https://doi.org/10.1257/089533003321164967

  • Shiundu, M. V. (2009). A survey of the factors influencing investment decisions: The case of individual investors at the NSE (Doctoral Dissertation, University of Nairobi). http://erepository.uonbi.ac.ke:8080/xmlui/handle/123456789/13223

  • Starmer, C. (2000). Developments in non-expected utility theory: The hunt for a descriptive theory of choice under risk. Journal of Economic Literature, 38(2), 332–382. https://www.jstor.org/stable/2565292

  • Subash, R. (2012). Role of behavioral finance in portfolio investment decisions: Evidence from India (Charles University, Faculty of Social Sciences). http://hdl.handle.net/20.500.11956/43150

  • Tauni, M. Z., Fang, H. X., Roa, Z.-u.-R., & Yousaf, S. (2015). The influence of investor personality traits on information acquisition and trading behavior: Evidence from Chinese futures exchange. Personality and Individual Differences, 87, 248–255. https://doi.org/10.1016/j.paid.2015.08.026

  • Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral Decision Making, 12(3), 183–206. https://doi.org/10.1002/(SICI)1099-0771(199909)12:3%3C183::AIDBDM318%3E3.0.CO;2-F

  • Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases: Biases in judgments reveal some heuristics of thinking under uncertainty. Science, 185(4157), 1124–1131. https://doi.org/10.1126/science.185.4157.1124

  • Verma, R., & Verma, P. (2018). Behavioral biases and retirement assets allocation of corporate pension plans. Review of Behavioral Finance, 10(4), 353–369. https://doi.org/10.1108/RBF-01-2017-0009

  • Yan, S., Huang, D., & Soleymani, M. (2020, October). Mitigating biases in multimodal personality assessment. In, ICMI’20: Proceedings of the 2020 international conference on multimodal interaction (pp. 361–369). https://doi.org/10.1145/3382507.3418889


Abstract Views: 107

PDF Views: 0




  • Behavioral Finance - An Emerging Theory : A Review Study

Abstract Views: 107  |  PDF Views: 0

Authors

Arfat Manzoor
PhD Research Scholar, Department of Commerce, University of Kashmir, Hazaratbal - 190 006, Srinagar, Jammu & Kashmir, India
Andleebah Jan
PhD Research Scholar, Department of Management, Islamic University of Science and Technology, 1-University Avenue, Awantipora, Pulwama - 192 122, Jammu & Kashmir, India
Mohammad Shafi
Professor, Department of Commerce, University of Kashmir, Hazaratbal - 190 006, Srinagar, Jammu & Kashmir, India

Abstract


Purpose : This paper debated market efficiency and asset pricing through an extensive review of literature in favor as well as against the well-known efficient market hypothesis (EMH). The purpose of this paper is to provide a comprehensive literature review of behavioral finance to label it as an alternate theory of asset pricing.

Methodology/Design/Approach : In this paper, the literature review is divided into three parts. Part-1 provides a review of EHM, its dominance, and downfall. Part-2 discusses the rise of behavioral finance as an alternate theory, and part-3 discusses the influencing factors of investment behavior. Three criteria were set for the selection of the articles. First, only relevant and most articles published from 2000 – 2022 were selected, and second, the most important articles published before 2000 were also included. Third, only those articles were selected that were published in the English language.

Findings : Comprehensive literature review in this paper helped in solving the market efficiency problems. It shows how the concepts of market efficiency and rationality were challenged by the new field of a discipline known as behavioral finance. Through further discussion on behavioral finance, this paper points out many gaps and also suggests how to bridge them.

Originality/Value : This is an extensive study that not only discusses the rationality approach of asset pricing through EMH, but also discusses behavioral finance and its relevance to asset pricing. This study can assist the researchers to focus more on behavioral finance and explore more determining factors of the investment behavior of the investors.


Keywords


efficient market hypothesis, behavioral finance, behavioral biases, personality, emotions

JEL Classification Codes : G10, G11, G40, G41


References





DOI: https://doi.org/10.17010/ijrcm%2F2023%2Fv10i1%2F172802