Research On Psychology And Behavioral Bias Of Individual Investor

Since1980s, more and more financial puzzles were found out with the progressof the studies on finance such as the equity puzzle, closed-end fund discount puzzle,capital market volatility puzzle, disposing effect. These puzzles and investor’sbehavioral biases on financial market show that traditional financial theory has someboundedness in describing the inner law of financial market. There are someproblemsto resolve for scholars, for example: how to comprehend thses financialpuzzles, what are the key factors that result in thses financial puzzles. Behavioralfinance tries to put forward explanation for these puzzles from the viewing angle ofthe actual behavior and psychology of investor. Behavioral finance thinks that thedeviation between theory and real evidences on capital market mainly derives fromthe hypothesis of perfectly rational investor. Actually investor is not perfectly rational,so the emphasis of financial research should shift from statistical analysis of group toactual behavior of individual. The hypothesis of perfectly rational people should shiftto complex social people.The dissertation follows the paradigm of Behavioral finance. The dissertationresearches behavioral biases and the influence of individual investor’s psychology tobehavioral biases on the entry piont of psychology. The findings of research in socialpsychology indicate that self-esteem need and correctly cognizing the world are thetwo fundamental motivation of human behavior. The dissertation focuses on the lawof mankind cognition, and analysis the fundamental cause of behavioral bias ofinvestor. The dissertation thinks that eslf-esteem is the key factor that influenceindividual investor, and use the enhance mechanism and the defense mechanism ofself-esteem to classify investor’s behavioral biases. The dissertation uses certainpsychology to explain certain financial puzzle. The dissertation builds up amean-value variance portfolio model based on loss aversion, and use the day data oftwenty-six stocks included in50-index of Shanghai Stock Exchang. Lastly thedissertation builds up a descriptive model of behavior from cognitive perspective based on the foregoing part of this dissertation, and summarizes the behavioralcharacteristic of individual investor.The dissertation has seven chapters. Main contents of each chapter are asfollows:Chapter one is the Introduce. It mainly introduces the background and researchvalue, cardings research status quo in behavioral bias, explains related concept andstates the purpose, main contents and the frame of the dissertation.Chapter two is the Related Rationale. It mainly introduces the rationale of thedissertation from the perspective of investor’s behavior including traditionaldecision-making theory, prospect theory, information processing theory in cognitivepsychology and complex scientific management. Lastly it summarizes the presentresearch methods in investor’s behavior.Chapter three is the Psychology of Investor’s Self-esteem. Firstly, this chaptersummerizes self-esteem. Secondly, states the formation mechanism of self-esteem,and two mechanism, self-enhance and self-defense, of self-esteem. Thirdly, cardingsmeasure methods of self-esteem. Forthly, analyse the influence of self-esteem oninformation processing. Lastly, uses self-attribution to explain overreaction andunderreaction, and overconfidence to volatility.Chapter four is the Psychology of Investor’s Loss Aversion. Firstly, this chaptersummerizes loss aversion. Secondly, studies the formation mechanism of lossaversion. Thirdly, analyse the influence factors to loss aversion. Forthly, analysemeasure methods of loss aversion. Lastly, uses loss aversion to explain equity puzzleand disposing effect.Chapter five is Investor’s Cognitive Psychology. The chapter analyse thestructure of cognition, and put forward the descriptive model of investor’s behavior.Then the chapter states heuristic methods of decision-making, and usesrepresentativeness heuristic to explain overreaction and underreaction.Chapter six is Investor’s Behavioral Biases. Firstly, this chapter analyserationality and irrationality of investor’s behavior. Secondly, this chapter analyse thecauses of behavioral biases. Lastly, analyse the relation between various behavioral biases from the viewing angle of self-esteem based on research findings before.Chapter seven is Conclusion and Prospect. The last part summarizes the wholedissertation’s research, and points out the limitation of the paper and the futureresearch expectation.