Akademik Veri Yönetim Sistemi
Innovative Approaches in Social, Human and Administrative Sciences, H. Hale Künüçen,Xatire Quliyeva,Yılmaz Seçgin, Editör, Ekin Yayınevi, Bursa, ss.140-154, 2019
Behavioral Finance studies on two topics
regarding finance markets. First one is that investor’s psychology can be a
barrier to act rationally. The other one is that investor’s arbitrage abilities
might be limited for the overpricing situation. In accordance with both topics,
financial crisis shall be examined within the scope of behavioral sciences
including behavioral finance, behavioral economics and neuroeconomics.
Financial crises occur periodically due to
various reasons. However, speculative bubbles would be defined as the main
reason. A bubble is that the price of an asset rises to a level that is higher
than it would be in the absence of the rationality. Furthermore, a rational
observer’s forecasting might not be a high short-term ROA (return on the asset)
for this price level. For instance, in many discussions on 2008 recession the
common idea was that a bubble occurred in real estate industry. After 2006,
real estate prices had been increased unsustainably and reached to high levels.
Whether a bubble is too swollen it would burst. In this case this price bubble
burst and triggered widespread defaults on subprime mortgage. It lowered the
value of banks’ subprime-linked holdings. Then banking system was highly affected
beyond the foresights of the qualitative risk management. At this point the
financial crisis is applied by behavioral economics and behavioral finance.
Because these applied sciences are as new disciplines with the aim of examining
the bubble formation by the improved responses to risk changes. These
multidisciplinary fields consisting of psychology and economics. It aims to
analyze investment decisions and investors’ behaviors. In this chapter
financial crisis is caused the questioning the adequacy of the current economic
approaches. Because the current economic approaches try to figure out the
reasons of the crisis by rational expectations, maximization of utility
function and information shocks.
These approaches are not defined as
adequate to predict the financial crisis or explain the reasons. The current
approaches are inadequate because the human behavior cannot be predictable.
Behavioral finance focuses on this point. It is based on the irrationality of human
nature. The investors are human so while making decisions they would not act rationally.
It means that the investor would not consider on the profit maximization, he can
act with the effects of emotions. For example, even if the selling the stock is
the rational option, investor might will to keep and retain it. Or even if it
is not a rational option, it can be invested in the same stock as other
investors show great interest. Explaining the situations like these with
traditional theories would not be adequate. Bubbles are taken into the
consideration by using behavioral analysis. Financial markets include both
information and noise. Therefore, they are in complex forms. Information
affects fundamental values. Noise is the opposite of information and means
inaccuracy in ideas and data. Shortcuts, rules of thumb, or heuristics to
process market signals are developed by risk managers in financial
institutions. Behavioral finance investigates how risk managers gather,
interpret, and process information and noise. Particularly, the process
features perception and cognitive bias. Therefore, models can be built by
influenced behavior and it can shape decisions. It means that the biases can
change the decisions.
Behavioral finance offers a new way of
looking at the processes taking place in capital markets. By referring to
psychology and examining on the imperfections of human mind, it makes clear to
see the mistakes of both individual and professional investors.
Two emotions guide people when investing.
These are fear and greed. The fear is about losing the existing standards of
living. Therefore, they tend to keep a portion of savings in very safe
securities like treasury bonds. This type of securities is designed to preserve
the real value of money in time. Greed is about the desire of jumping to a
higher standard of living. This motivates investors to accept unnecessary risk
with the hope of gaining high profits. Very safe and high risk instruments can
be included in a portfolio without considering on the correlation between two.
It is related with narrow framing consisting of analyzing problems in an
isolated manner.
In people’s mind, there is a mental
accounting. This is created as separated account for the various types of
expenses and incomes. For instance, the money won in lottery is easier to spend
than hard-earned savings. As rationally, one dollar equals one dollar regardless
of how easy or hard to be earned.
Besides greed, underestimated risk is
another noteworthy point regarding the behavioral and physiological bias.
Forgetting risk is often seen during the chase after higher and higher rates of
return. An overconfidence occurs and it is a causative situation for
underestimating risk.