Investor Psycology and Behavioural Finance

Abstract

Behavioural finance theories and models argue that the definition of stock prices is influenced by psychological, cognitive and emotional factors of investors. The presence of investors, who do not act rationally on the stock market, and the fact that psychological and emotional factors are effective in the decision-making process distract the stock market from being effective.

Determining the investor behaviours that cause the anomalies detected in the stock market and putting out the possible reasons is important in terms of estimating the share price. In this study, information was given on traditional finance theories that accept individuals as rational. Behavioural finance models and theories were examined to investigate irrational behaviour. In addition, anomalies resulting from irrational behaviour of investors and investor behaviour were examined, and also the relationship between investor behaviours and anomalies was examined.

In finance, academic research on behaviour started in the 1980s. The use of behavioural finance concepts in institutional investing took hold in the 1990s. Behavioural concepts guided the creation of models that used earnings expectation data beginning in 1990. It took several more years before behavioural finance started to gain traction with institutional investors.