Influence Study Of The Cognitive Biases On The Investors' Perceived Risk And Its Effect In Security Market

With the continuous development of the securities market species, expanding of trading scale and increasing of the participants, the securities market risk is increasingly becoming an academic and the investor issues of common concern. Security market risk is generally defined as the price fluctuations or possible loss in securities, which is an objective measure of risk. In traditional financial theory, the assumption of rational people assume that people have all the information and unlimited memory, computing power to make decision. Therefore, the objective risk has also been equated with the subjective perception of risk to the investors.However, with the rise of behavioral finance, the important theory in behavioral finance, cognitive bias, has been generally accepted by scholars because of its perfect interpretation of various financial market anomalies. In fact, the cognitive bias exists in all the information cognitive process and decision-making process and, therefore, would clearly affect the objective risk perception process for investors. In this paper, the perception of objective risk come after information processing is defined as the subjective risk. I examined the role of cognitive bias in investors' risk perception process, which results in the deviation of the subjective risk. I verify the bias of risk perception which results from cognitive bias through the acts of the experiment. What' s more, the mathematic method is used in this paper to demonstrate the departure of the subjective and the objective risk in the security market.This article contains five sections, the first part is introduction, which introduces the main topics of this article and describes the background and significance of it. On this basis, this part points out the innovation and lack of this paper. The second part discusses the effect of representative heuristic, anchoring and adjustment, framing bias, mental accounting, overconfidence and confirmation bias on the information process of risk. The third part provides analysis of the questionnaire on the investors biased risk perception. The fourth part demonstrates the departure of the subjective and the objective risk in the security market through the empirical analysis. The fifth part gives suggestions for the investors to avoid cognitive bias and for asset management institutions to develop new financial products.