Study On Behavior Of China's Individual Investors And Investment Strategy Based On The Limited Rationality

It is a hot issue in domestic financial academia to study the investors behavior and investment strategies in China's jumped-up stock market based on behavioral finance theory in recent years. In this paper, it will be discussed what is individual investors behavior and their investment strategies based on the limited rationality, and it will be verified how is the applicability of the investment strategy through empirical analysis in China's securities market. This provides a useful reference for individual investors in China's securities market.First of all papers presented the related theories with investors behavior and the investment strategy, including the hypothesis of complete rational and hypothesis of limited rationality, the standard financial theory and behavioral finance theory. This establishes a solid theoretical basis for studying individual investors behavior and investment strategy.Second, the thesis studies the relationship of the decision-making under the uncertain conditions and the limited rationality. Complete rationality and limited rationality is respectively their theoretical basis of the standard finance and behavioral finance. Standard finance considers that man is totally rational takes "Principle of maximizing" as the pursuant goal. And behavioral finance considers that man can not be completely rational and is limited rationality because of the external environment and his own constraints. Subsequently limited rationality model and depth development has been studied in the article also.Third, the thesis studies the mechanism of the cognitive bias and a forming way from cognitive psychology angle, and studied China's individual investors typical cognitive biases and the impact of these cognitive biases on individual investors. Research shows that the imperfection of human brain is so much as their perfection is, and human information processing is impacted and constrained by many factors and form the cognitive bias, including the representative bias, law of small number, Conservatism bias, anchoring bias and mental accounting. These cognitive biases lead to the market phenomena fundamentally. Fourth, the thesis introduced the concept of mentality and emotions, characteristics and the impact on investors from the emotional psychology angle, and emphatically analyzed China's individual investors typical mentality and emotions, including the speculative mentality, rich-quick mentality, greed, fear and impetuous, and so on, while focusing on the compact of a group on individual emotion and the resulting herding behavior. Mentality is the starting point and platform that of the individual treats the outside objective things, and is a point of reference or basis points. Good mentality can guide investor to treat problems rationally, which will bring investors the infinite benefits. Moreover mentality happens with a strong, short and sharp characteristics generally. A good mentality and stable emotion can guide investors decision-making and investment rationally.Fifth, on the basis of a comprehensive understanding to individual investors cognitive bias, emotion and mentality, the thesis focus on self-management and investment strategies based on the limited rationality. Investors of different personality have the different levels of risk bearing, even if the same type of investor also have different levels of risk bearing, and individual investors with different personality types and risk bearing should take a different investment strategy. Individual investors should strengthen self-management in the investment process, including the mentality management of pre-investment, emotional management in investment process and the rhythm control in investment process, and so on. The thing will be changed along with heart, Habitat made by the heart, all troubles given birth by heart. A good control of mentality and emotion is half the success of the investment. For individual investors, understanding their own and overcoming their own are the first-line condition for success.Finally, the data are selected in the Shanghai and Shenzhen stock markets from 2001 to 2007, which are used to test and analyze the applicability of the reverse investment strategy and momentum investment strategy in China's securities market. Empirical studies have shown that reverse investment strategy is the best investment strategy for individual investors, and momentum investment strategy does not apply to individual investors. This provides some reference for China's individual investors in the future.