Tag: Behavioural Finance

Dr. Antonios Antoniou: Behavioural Finance Part 1

Behavioural Finance pic
Behavioural Finance
Image: investopedia.com

Chief Executive Officer of Finance, Research, Training, and Consulting, Dr. Antonios Antoniou demonstrates a long and productive history of financial research. He has served in academics, consulting, and as a respected author of multiple published financial articles, sharing knowledge gleaned from his research. One of the areas of research on which Dr. Antoniou focuses is behavioural finance.

The social sciences study human behaviour and the effects it has on the way people live their lives. Behavioural finance provides study into the specific area of how psychology affects financial behaviours, as well as the effects that those behaviours have on financial markets. Such knowledge may help provide an understanding of anomalies that occur in securities trading around the world. Most financial theory is based on rational and logical behaviour; however, human beings often defy logic and rationality. Behavioural finance seeks to create models for market fluctuations driven by emotion. For instance, logic dictates that gambling favors the house. A non-behavioural financial model might then posit that most people would not turn to gambling as a financial strategy; however, as many people who buy lottery tickets, attend horse races, or spend significant amounts of time in casinos can attest, gambling for some provides their main retirement plan. Human psychology is the only way to explain this anomaly.

Many common anomalies are attributable to behavioural finance. For instance, the January effect describes the facts that small firms often have a higher rate of return in January than any other month of the year. Another is the winner’s curse, in which winning auction items tend to exceed their intrinsic value. This may be attributable to competitiveness and the desire to win.