Theory of Behavioral Finance and Its Application to Property Market: A Change in Paradigm

摘要

It is considered that behavioral finance is basically the extension of behavioral economics. It is specially related to the arena of thinking of investor and his mind towards the stock market. The main objective of this study is to define the emotions based theories which are used to explain the stock market problems and terms. It is also critically analyzed the issues related property for behavioral research and the theory of behavioral finance. After the analysis of this paper we came to know that investors cannot always motivated by emotions, and it is not necessary that the property market will only be sufficient at the weak form efficient. There is a need of deep analysis for the theory of behavioral finance. The two major concepts of behavioral finance are discussed by this paper. First, investor psychology and limit to arbitrage. Next, the theories related to psychology used in behavioral finance both are reviewed. The identification of issues related to property market is made possible by the analysis of behavioral finance theories and development. This analysis is useful to understand these theories by using behavioral model. Investor always want to invest in those projects which having greater profit and the minimum chances of loss or risk. So this psychology of investor is also discussed in behavioral finance. It is also considered the feelings and thinking errors which encourage the investors and process of making decisions. Next the paper will discuss about the human behavior theories which can motivate or demotivate the human’s mind to make any decision. These theories will be discussed later in detail. These are Prospect theory, judgment under uncertainty (overconfidence, fear of regret, Representativeness heuristic, Availability heuristic, Anchoring and judgment). If we discuss about stock price irregularities related to reaction higher than expectations of investor, under reaction, force strategies, steering Behavior, effect of the size of firm and book value or market value ratio effects. The behavioral model is excellent to explain all these anomalies. Possessions or real estate research is concentrated on the human behavior because they believe that all the decisions are made in the property or real estate markets are always from the perception of human behavior. Similarly investor is also a human so the investment decisions will always made by the person who is interested in doing some investment. He will always focus the market conditions and then he will decide whether he should invest or not. These human behaviors and psychologies having a great effect on the stock prices. As human behavior might have biases about the property valuation field and also about the market information. This will have to discuss in this research paper that how behavioral finance can help the investor to make wise decisions. The behavioral finance paradigm, claims that investment adoptions are not always made on the basis of full rationality but it is necessary to understand the investment market sensations. The behavioral research issues those will be discussed and analyzed in this paper will lead to the path for developing a joined strategy for the investment in property.