Behavioral Aspects Of Market Anomalies Essay

726 Words Dec 16th, 2016 3 Pages
Behavioral Aspects of Market Anomalies Anomaly is defined as ‘something that deviates from what is standard, normal, or expected’ by Oxford dictionary (2016). George and Elton (2001) has defined market anomaly as a new or unexpected phenomenon in relation to any theory, model or hypothesis. The founder of behavioural finance, Tversky and Kahneman (1986), suggested that the market anomalies are the indicators of inefficient markets, which might either occur only once and disappear, or occur regularly. The school of Neoclassical Finance is currently the prevailing paradigm in the finance field. In neo-classical finance, the investors make statistical judgement based on Von Neumann–Morgenstern utility theorem and Bayesian techniques (Ackert and Deaves 2010¬). On the other hand, in behavioural finance, the investors use heuristic to simplify the complicated decision-making process (ibid. 2010). The researchers in behavioural finance have produced evidence that the investors do not always behave in a rational manner and this irrational behaviour could create the stock market anomalies, such as overreacting to good or bad news. According to Boudoukh, Richardson and Whitelaw (1994), there are three schools of thought giving the possible explanations of the financial market anomalies, namely loyalists, revisionists and heretics. The ‘loyalists’ support Efficient Market Hypothesis (EMH) by pointing out the problem of data mining or market imperfections, the ‘revisionists’ support…

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