Behavioral Finance and Human Interaction

Paper Summary:

The stock market's dominant theory, the efficient market hypothesis (EMH) has been greatly criticized recently for its failure to account for human errors, heuristic bias, use of misinformation, psychological tendencies, in determining future expected performance and obtainable profits. Existing evidence indicates that past confidence in the EMH may have been misdirected, as the theory's models do not show a thorough understanding of trading operations in a realistic light.
Researchers have suggested that a variety of anomalies and inconsistent historical results demand that traditional financial theories, namely the EMH, be reconstructed to include human interaction as a key decision-making process that directly affects the performance of financial markets. This research paper determines whether or not there is a need for a refined financial model that incorporates the behavior of the stock market's investors. The paper includes tables and graphs.

Table of Contents:

I. Introduction
A. Importance of the Study
B. Purpose of the Study
C. Problem Statement
D. Rational of the Study
E. Scope of the Study
F. Definition of Terms
II. Review of Related Literature
A. Introduction
B. Body of Text
C. Summary
III. Method Used in Research
A. Approach
B. Data Gathering Method
C. Data Base Used for Analysis
D. Analysis of Data
E. Validity of Data
F. Method Originality and Limitations
IV. Data Analysis
V. Summary, Discussion and Recommendations
Bibliography

From the Paper:

"According to Barrett and several financial analysts, when investors watched the Nasdaq "blast through the 5,000-point threshold in March only to give back half its value by year's end", most investors felt the need t re-evaluate his expectations and investing philosophy.
The same group of investors that had dumped endless streams of cash into shaky Internet stocks at unprecedented prices suddenly pulled their money out of the stock market, afraid to buy even some of the leading industry stocks at low prices. This backs up research that states that the majority of individual investors will keep a losing stock too long and sell a winning stock too soon."

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