Decoding behavioral financethe practitioner's view (three articles)

Abstract

The aim of this thesis is to contribute to further systematization in the field of Behavioral Finance and to determine its implications for investor behavior and the functioning of financial markets. Our research is based on a comprehensive literature review and on evidence provided by a series of surveys to professional investors. In the first article, entitled “Overconfidence, Loss Aversion and Irrational Investor Behavior: a Conceptual Map”, we develop a conceptual map of Behavioral Finance, based on a review and synthesis of the literature. We identify overconfidence, loss aversion and herding as the main behavioral biases and we relate them to the psychological theories of the Representativeness Heuristic and the Prospect Theory. We also classify behavioral models based on the concepts of biased beliefs and unconventional preferences. The second article, “Prevailing Behavioral Biases and Investor Profiles: a Survey of Professional Investors”, is based on empirical evidence from a series of four surveys of professional investors with an average of 92 participants. First, we compare the relevance and level of education in Behavioral Finance, finding a significant lack of formal training among practitioners due to the lack of clarity and homogeneity of the theory, as attested by the participants in our surveys. Next, we analyze the prevailing behavioral biases and identify again representativeness, loss aversion and herding as the most relevant ones from the point of view of practitioners. Moreover, we evaluate investors’ under- and overreactions under different financial scenarios, highlighting the prevalence of overreaction under most circumstances. We conclude the article by classifying investors’ and clients’ profiles according to the Bailard, Biehl and Kaiser model. We identify overconfidence as the predominant bias among practitioners and find a clear lack of alignment between the two. The third article, “Impact of Education, Age and Gender on Investor’s Behavior: Modeling Confidence”, is based on a new comprehensive survey of 106 professional investors, with the aim of analyzing the impact of education, age and gender on investors’ irrational behavior and level of confidence. First, the research confirms several previous findings, including the gap between lack of education and the relevance of Behavioral Finance, as well as the divergence between investor and client profiles. Regarding the impact of education, our research focuses on the Chartered Financial Analyst (CFA) accreditation and on the hours of learning in Behavioral Finance. CFA Charterholders have a higher level of training and admit to being particularly influenced by herding behavior. Concerning gender, female investors have a higher level of education, view themselves as more driven by rational analysis and are more risk-averse, which is consistent with the literature. Regarding age, younger investors unanimously highlight the relevance of Behavioral Finance and acknowledge being more influenced by both cognitive and emotional biases. Finally, we develop a model to determine investors’ confidence, with female and more experienced investors exhibiting higher levels of confidence. In contrast, the CFA accreditation and the level of training in Behavioral Finance do not have a significant impact on investors’ confidence, which suggests that knowledge of the theory does not prevent irrational behavior by practitioners.