Behavioral Finance

Re: Behavioral finance

From this article written by Jay R. Ritter, writing about cognitive psychology & arbitrage limits, I found that it is ‘funny’!

Jay tried to bring out the “phenomenon” that people maybe stick to what they believe, how they tend to think in deciding actions on investment. For example, “losing $1 = winning $2” and “lobster-home VS lobster-restaurant”. All of these are actually human behavioral study.

I do think that his analysis is not wrong. His findings are also making sense. But, shall we look into the function of this paper?

In fact, before or after his study from this paper, even not for everybody, I believe at least quite amount of people ‘in’ investment market will probably ‘know’ what Jay’s said. Just as Jay said, people think separately between eating lobster at home and in restaurant. BUT, acknowledging problem doesn’t necessary mean improvable.

People already knew that they are thinking in these ways (what Jay’s mentioned) and many of them will probably knew that they should act more rationally, setting aside their own ‘framing’, acknowledging pass succeed but not sticking to it, if they want to reduce their losses, or even gaining in the future. But people simply just cannot change! It doesn’t end like people “live happily ever after”.

Paper issued in 2003, I am sorry that I cannot agree if this can quite improve the market as a whole from being hurt too much afterwards…

If this issue is only aiming to ‘points out’ some finding, and that’s it. It is fine. It is just not enough to be treated as some way of material to ‘teach’ people how avoiding loss can be done. Human natural is hard, or I should say, cannot be changed so easily. Take an easy example, there is very few people who concern about their ‘PV and FV’ when buying stock in the market. “Well, he said he could double my money. So I bought”. That’s how people always and will continuously think.

If someone can somehow really alters human natural of action...