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Behavioral finance and financial investment decisions (Doctoral thesis)

Κωνσταντινίδης, Αναστάσιος/ Konstantinidis, Anastasios

The investment behavior of individuals and the methods through which investment decisions are taken has been frequently a key issue in financial research. The dominant investment theory until the mid ’90s, the Efficient Market Hypothesis, was considered the cornerstone of people’s investment behavior. According to the specific hypothesis, the people involved in investment process are driven by rational behavior, are dissociated from emotions and biases, and information is always available to the investing public, without affecting the progress of investment tools. In addition, earlier and new information are not particularly essential and are incorporated in stock prices. Thus, rational investing behavior and incorporation of information, in conjunction with efficient markets in the long run, contribute to establishing investment equilibrium. Its rigid approach as well as the weaknesses and deficiencies characteristic of the Efficient Market Hypothesis caused the emergence and establishment of an alternative economic model, Behavioral Finance. Investor rational behavior and efficient markets contradict investor psychology, subjective rules of behavior and long-term return anomalies. Information incorporation and the balancing approach used by speculation processes are challenged by the inefficient access to investment information and long-term imbalances in investing practices. Behavioral Finance combines economics with psychology and draws information from other disciplines (sociology, history, anthropology) to interpret the behavior of individuals who are required to take investment decisions. The new financial paradigm is a theoretical transcending model which does not treat investors as an army of rational individuals, but as people with weaknesses, biases and non-rational behavior which interprets long-term inefficient markets. The present thesis is a research - among others - which aims to endorse the comprehensive scope of the new paradigm and the significance of emotional and cognitive errors and biases in shaping incorrect and irrational investment behavior and decisions. It discusses major emotional and mental errors, overconfidence, framing, herding, mental accounting, loss aversion and representative bias as well as biases which have a substantial impact on each of those effects separately. In addition, the research, which is based on data drawn from qualified executives in brokerage firms located in Athens, and which was carried out for the first time in Greece, attempts to explore whether qualified business executives are driven by emotional and psychological processes and biases. Thus, the great significance and import of the research is highlighted by the fact that business executives play an influential role in companies, manage portfolios and have a substantial effect on the equilibrium of the money market. The research results and the concluding remarks demonstrate the essential role of Behavioral Finance and enhances its significance by establishing that this new paradigm, rather than a new alternative model, is the financial approach which determines investment strategic paths.