Professor

Investor Irrationality and Self-Defeating Behavior:
Insights from Behavioral pay

Sudhir Singh, Professor of Finance and Associate Dean, College of Business, Frostburg State University


ABSTRACT

The efficient trades hypothesis (EMH) has posited investment decision-makers as rational, utility-maximizing individuals. Cognitive psychology, on the other hand, suggests that homosexual decision processes ar susceptible to several illusions: those caused by heuristic decision-making processes, as vigorous as those arising from the adoption of mental frames. Unfortunately, these heuristics may lead to cognitive illusions that include: re bear witnessativeness, over-confidence, anchoring, gamblers fallacy, loss aversion, regret aversion, and mental accounting, among others. Behavioral pay proponents argue that heuristic-driven bias and framing effects cause market prices to deviate from fundamental values. This field amalgamates theories from financial economics, psychology, and sociology in an seek to construct a more complete model that incorporates the idiosyncrasies of human behavior in financial markets. This paper argues that understanding of the findings of this search benefits individual investors the most as it seeks to create awareness of the mingled human biases and the high costs they impose on their portfolios.





INTRODUCTION

The pause of the dot-com era of the late nineties and the continuing present anxiety over stock market performance has had a sobering effect on investors and warranted a revisiting of the rules of investing. Following the blasting events surrounding the bursting of the speculative technology bubble in establish 2000 and the real estate bubble in September 2008,, refreshed attempts are being made to explain the behavior of financial markets, one of the foremost of which is in the area of behavioral finance.

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