Behavioral Finance Theory Review

Abstract: Behavioral finance theory is the late 20th century to the standard financial theory questions and challenges emerging in the developed financial theory, the development and improvement of corporate finance theory is important. In this paper, the origin of behavioral finance theory to start to explain the behavioral finance theory generation, development and theoretical models of behavioral finance theory, reviewed the future direction and prospects.

Keywords: modern financial theory, behavioral finance financial standards

First, the origin of behavioral finance theory - the standard financial theory challenged

Since 1952, Markowitz's portfolio theory to open modern financial theory first of its kind, M & M theory, capital asset pricing model (CAPM), efficient capital market theory, Black-Scholes stock option pricing models, and other public companies theories laid the standard financial theory. But another fundamental problem in finance - investors are not necessarily the actual decision-making process is the best decision - standard financial theory is powerless .20 In the 1980s, some non-efficient financial markets prompted the new theory emerged, mainly in the following areas:
1 scale. Banz (1981), Barnber (1997) found that future stock price changes and stock represents the company's size has a close relationship. Large stocks of small companies easier access to higher stock returns, which kinds of phenomena is particularly evident in January. Obviously, the size of the company is well-known information on the market, if markets are efficient, then the information should not be able to obtain excess returns.

2 calendar effects. French, Gibbon and Hess, Ariel found that price movements associated with the date, in particular, to point out that the weekend effect, empirical results show Monday to Friday in the rate of return on investment, return on investment not only on Monday is the lowest, and is negative in other words, you can buy the original on Thursday or Friday of securities investment plan, postponed to Monday, and will sell the securities of the investment plan on Monday, postponed until Friday, you can reap excessive profits.

3. Contrarian investment strategy. Debondt, Thaler, Lakonishok, Shieifer and Vishney that a stock level of concern also affect the stock price changes. Concern stocks often have lower yields, and less attention from stocks can often get a higher return on investment, so investors can take a "contrarian" strategy to obtain excess returns.

These phase to the traditional financial theory has had a huge impact, and a lot of psychology and behavioral studies show that investors exhibit the characteristics of non-rational. Behavior theory is non-rational decision-making of investors came into being.


Second, behavioral finance theory, the basic content - theory and basic model

Through the use of behavioral economics behavioral finance framework, through the actors in the financial market behavior of the real observations, the main decision-making process to explore the psychological factors and behavioral characteristics, and thus to explain and predict the behavior of financial markets on the real Generally considered, the theoretical basis for behavioral finance theory, there are three main areas:
1 decision-making characteristics. Behavioral finance theory of decision-making characteristics manifested in the diverse preferences of decision makers to seek satisfactory rather than optimal decisions. Decision-makers' preferences are volatile, and only in the formation of decision-making process .

2. Expectancy theory. VonNeumann (1947) so that decision-makers seeking to form a weighted estimate of expected utility maximization, but a lot of evidence shows that people tend to deviate from expected utility theory prospect theory to the phenomenon of violation of expected utility theory attributed to into three effects: namely, to determine the effect, reflection effect and separation effect.

3. Cognitive Psychology. Kahneman, Professor of Cognitive Psychology from his departure, combined with Simon on human problem solving and decision-making process of "bounded rationality" point of view, the psychological characteristics summarized as follows: (1) loss avoidance; (2) mental accounting ; (3) excessive self-confidence; (4) tend to cognitive biases. Links to free download http://www.hi138.com In recent decades, behavioral finance theory, the results significantly, the formation of some of the major model :
1. Herding model. Bannerjee (1992) made the most influential model of sequence-based herding. The model explains the investors in the market produce the causes and consequences of group behavior, the behavior of groups of investors attributed to maximize the effectiveness of the drive and the "pressure groups" and other emotional effects.

2. Conduct asset pricing model (BAPM). Shefrin and Statman (1994) proposed BAPM the traditional capital asset pricing model (CAPM) has been adjusted. BAPM that the financial markets in addition to the traditional CAPM in strict accordance with the information for portfolio trading those, there are some investors are not acting according to the traditional CAPM, because they receive inadequate information, thus committing a variety of cognitive bias error.

3. BSV model. Barberis, Shleifer and Vishny (1998) proposed a BSV model, the theory that there are two investors in the decision-making psychological bias: selection bias and conservative bias due to income change is random, so the two kinds of investors will bias judgments made two errors: inadequate response and overreaction.

4. DHS model. Danie, Hirshleifer and Subramanyam (1998) proposed a DHS model The model that investors in the market is divided into two types of free information and information that the former does not exist to determine the bias, the latter showing excessive self-confidence and preference for two kinds of self-judgment bias. excessively exaggerated self-confidence led investors to judge the value of private information on the accuracy of the stock; self-preference caused investors overreact to private information and the inadequate response of public information. reflected in the short-term stock price will maintain continuity and long-term due to over-react and rise early.

5. HS model. Hong and Stein (1999) proposed a HS model the model to market news watchers and momentum investors are divided into two types of traders in the stock price prediction, the message is not entirely dependent on the observer current or past prices, but according to their access to information on the future value of the stock; momentum traders put their forecasts based on a historic price on the basis of a simple function.


Third, behavioral finance theory for the evaluation and future development

Behavioral finance theory and the standard financial theory are mutually reinforcing relationship. Behavioral finance theory is the study of financial subjects of the selection process theory, which seeks to uncover the main selection process of the "black box" that combines psychology, sociology, finance, and multi-disciplinary knowledge, the introduction of standard financial theory of psychological variables, adjusted for traditional financial theory to explain the large number of standard financial theory, contradictions and chaos in the office. But behavioral finance theory is not mature, it can not be independent of the standard financial theory, and because psychological variables difficult to measure, yet theoretical assumptions of rational research; and that the theory is not yet a large number of financial markets to explain the phenomenon in general, so the research should pay attention to combine the two. I believe that the development of behavioral finance theory, should address Good question below:
1 behavioral finance theory that the emotional factors of price, so the market is not fully effective in this study is based on what factors can affect investors' willingness to invest;
(2) social and cultural differences and national policies have been proven to affect investor decision-making factors. Behavioral finance theory can be studied at what time the government should intervene in the market and stable prices of the securities;
3. Our common equity financing preference of listed companies of reality, most of the research literature on the financing choice theory to explain the actual cost of equity financing than debt costs from the perspective of behavioral finance, how to look at how to handle equity and debt financing is a research trend.


References:
[1] Raoyu Lei, Liu Dafeng <<behavioral finance>> Shanghai Finance University Press, 2003.

[2] Xia <<behavioral finance theory, Retrospect and Prospect>> Jianghan Forum, 2006 7.

[3] Lu Xiangnan, the better, the development of behavioral finance theory and application of research, economic forums, 2005.20.

[4] Zhang Yan, on the theory of behavioral finance analysis, finance, 2008.

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