Stock Markets: Difference between revisions
New page: == DISTRACTION == One very important aspect of behavioral finance in the stock market is the affect that distraction plays on the consumers. It causes stock prices to underreact to news o... |
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== | =="Trusting the Stock Market"== | ||
''Paola Sapienza, Northwestern University & Luigi Zingales, Harvard University.'' | |||
The analysis of stock data and understanding it are not the only determinants of how much a person will invest. One of the major contributors according to behavioral economics is trust. A person who has very little trust tends to invest less than others or not invest at all. | |||
The overall trust in the market can be damaged by crashes to the market or even a particular | |||
stock. Although level of trust plays a role with all investors, the inexperienced investors distrust is more apparent. This is due to the fact that a combination of lacking information or ability to interpret information that can lead to being more trusting ultimately keeps that person out of the market. | |||
When it comes to investing, the age of the investor plays a role in the tendencies of the investor. The affect that age has on an investors decision making has almost everything to do with experience. It is assumed that age and experience go hand in hand. Younger investors tend to expect higher returns than older, more experienced investors. This is most likely due to the fact that although the older investors have probably had success at one point or another, they have also experienced disappointment, so they are more realistic with expectations. Younger investors are also known as | Although it may appear that level of trust is just another way of analyzing an individuals risk tolerance, the two are distinctively different. With risk tolerance, as some one is more risk tolerant, their portfolios tend to be less diversified. As someones trust level goes up, their portfolios tend to be more diversified. | ||
=="Driven to Distraction" == | |||
''David Hirshleifer; Sonya Seongyeon Lim; Siew Hong Teoh.'' | |||
One very important aspect of behavioral finance in the stock market is the affect that distraction plays on the consumers. It causes stock prices to underreact to news or signals about the future success of a company. | |||
The main reason for traders to get distracted from these details is the news on other stocks and industries. On days that there are many announcements being made throughout the market, stock prices for a specific company tend not to be affected as much as they would with announcements that are made on relatively quiet days in the market. | |||
Investors tend to react more to news regarding a firm when made during trading hours, as opposed to when the market is closed. This is attributed to the distractions of the individuals personal life. Fridays often have more distraction than the days earlier in the week due to the upcoming weekend. Investors also tend to be more attentive to stocks when things are going good in an up market, and less attentive when they believe there is not as much money to be made. | |||
One of the proving factors that investors get distracted is the fact that a firm can re-release news reports that have already been made public, and the stock shifts accordingly. The problem of attention that exists with many investors cause them to overlook many economically related firms when they follow one firm. Underreaction of stock prices is a result of investor’s inability to focus on multiple things at once, and a lack of the necessary time for devoting sufficient attention. | |||
=="Inexperienced Investors and Speculative Bubbles" == | |||
''Robin Greenwood; Stefan Nagel.'' | |||
When it comes to investing, the age of the investor plays a role in the tendencies of the investor. The affect that age has on an investors decision making has almost everything to do with experience. It is assumed that age and experience go hand in hand. | |||
Younger investors tend to expect higher returns than older, more experienced investors. This is most likely due to the fact that although the older investors have probably had success at one point or another, they have also experienced disappointment, so they are more realistic with expectations. | |||
Younger investors are also known as trend-chasers because they are more influenced by a stock that has trend upward for a while, and more turned away from a declining stock. This is especially true when it comes to tech stocks. Part of the explanation for the fascination younger investors have with tech stocks is attributed to the fact that they tend to be more aware, and interested in the most recent technology. They are quick to jump on an upward trending tech stock. | |||
Another factor that contributes to the difference in stock market decisions between the experienced and non-experienced is the concern that the younger investors have about their career, if their career is in fact in this field. They make decisions with the fear of having to hold their job, and prove themselves hanging over their heads. | |||
Although there is no significant difference in the way the less experienced handle common occurrences such as earnings reports, they have a harder time handling bubbles and crashes. Since many of the younger ones have yet to handle either of those issues, when they happen, they struggle to maintain performance with the investors that have been through it before. | |||
<i> This page designed by Matt Walter </i> | |||
{{Behavioral Economics Nav Bar}} | |||
Latest revision as of 19:45, 3 May 2007
"Trusting the Stock Market"
Paola Sapienza, Northwestern University & Luigi Zingales, Harvard University.
The analysis of stock data and understanding it are not the only determinants of how much a person will invest. One of the major contributors according to behavioral economics is trust. A person who has very little trust tends to invest less than others or not invest at all.
The overall trust in the market can be damaged by crashes to the market or even a particular stock. Although level of trust plays a role with all investors, the inexperienced investors distrust is more apparent. This is due to the fact that a combination of lacking information or ability to interpret information that can lead to being more trusting ultimately keeps that person out of the market.
Although it may appear that level of trust is just another way of analyzing an individuals risk tolerance, the two are distinctively different. With risk tolerance, as some one is more risk tolerant, their portfolios tend to be less diversified. As someones trust level goes up, their portfolios tend to be more diversified.
"Driven to Distraction"
David Hirshleifer; Sonya Seongyeon Lim; Siew Hong Teoh.
One very important aspect of behavioral finance in the stock market is the affect that distraction plays on the consumers. It causes stock prices to underreact to news or signals about the future success of a company.
The main reason for traders to get distracted from these details is the news on other stocks and industries. On days that there are many announcements being made throughout the market, stock prices for a specific company tend not to be affected as much as they would with announcements that are made on relatively quiet days in the market.
Investors tend to react more to news regarding a firm when made during trading hours, as opposed to when the market is closed. This is attributed to the distractions of the individuals personal life. Fridays often have more distraction than the days earlier in the week due to the upcoming weekend. Investors also tend to be more attentive to stocks when things are going good in an up market, and less attentive when they believe there is not as much money to be made.
One of the proving factors that investors get distracted is the fact that a firm can re-release news reports that have already been made public, and the stock shifts accordingly. The problem of attention that exists with many investors cause them to overlook many economically related firms when they follow one firm. Underreaction of stock prices is a result of investor’s inability to focus on multiple things at once, and a lack of the necessary time for devoting sufficient attention.
"Inexperienced Investors and Speculative Bubbles"
Robin Greenwood; Stefan Nagel.
When it comes to investing, the age of the investor plays a role in the tendencies of the investor. The affect that age has on an investors decision making has almost everything to do with experience. It is assumed that age and experience go hand in hand.
Younger investors tend to expect higher returns than older, more experienced investors. This is most likely due to the fact that although the older investors have probably had success at one point or another, they have also experienced disappointment, so they are more realistic with expectations.
Younger investors are also known as trend-chasers because they are more influenced by a stock that has trend upward for a while, and more turned away from a declining stock. This is especially true when it comes to tech stocks. Part of the explanation for the fascination younger investors have with tech stocks is attributed to the fact that they tend to be more aware, and interested in the most recent technology. They are quick to jump on an upward trending tech stock.
Another factor that contributes to the difference in stock market decisions between the experienced and non-experienced is the concern that the younger investors have about their career, if their career is in fact in this field. They make decisions with the fear of having to hold their job, and prove themselves hanging over their heads.
Although there is no significant difference in the way the less experienced handle common occurrences such as earnings reports, they have a harder time handling bubbles and crashes. Since many of the younger ones have yet to handle either of those issues, when they happen, they struggle to maintain performance with the investors that have been through it before.
This page designed by Matt Walter
