Behavioral finance is an interdisciplinary subject of finance, psychology, behavior and sociology, trying to reveal the irrational behavior and decision-making rules of financial markets. The following are my collected papers on the basic concepts and theories of behavioral finance, and I will share them with you.

Behavioral finance theory focuses on the analysis of investors' mistakes, deviations and market anomalies caused by psychological factors in financial markets, which is a useful supplement to modern financial theory. Behavioral finance is not only valued in academic research, but also applied in practice. This paper summarizes the relationship between behavioral finance and modern finance, the basic theory of behavioral finance, and discusses how to apply the research results of behavioral finance to securities market investment.

Keywords: behavioral finance; Modern finance; Defensive investment strategy; Aggressive investment strategy

Behavioral finance explains, studies and predicts the phenomena and problems in the capital market from the microscopic individual behavior and the deeper psychological and social factors that produce this behavior. In America and Europe, behavioral finance has been paid more and more attention not only in academic research, but also in practice. Individual investors are applying the knowledge of behavioral finance to avoid psychological bias and cognitive errors, and institutional investors are also developing behavior-centered trading strategies with the essence of behavioral finance.

First, the basic concepts and theories of behavioral finance

So far, behavioral finance has not formed a set of systematic and complete theories. At present, most of the research results focus on identifying the psychological and behavioral characteristics of investors who will have a systematic impact on the capital market.

First, the psychological characteristics of investors.

Heuristic method for processing information. The amount of information in modern society is getting bigger and bigger, and the spread speed is getting faster and faster, and the situation faced by financial market decision makers is becoming more and more complicated. Decision makers will have to use heuristic methods more. Heuristic is to use experience or common sense to answer questions or make judgments. It means to interpret information quickly and selectively, relying heavily on intuition. Because of the rapidity and incompleteness of decision-making, heuristic methods may not get correct conclusions, which may lead to cognitive errors and judgment errors. Heuristic methods generally include: 1. Typical. This method of inspiration is the origin of a proverb:? If it looks like a duck and cries like a duck, it may be a duck. ? When forming expectations, people will evaluate the similarity between the probability of future uncertain events and recent observed events. Typicality makes investors overreact to new information, that is, investors give too much weight to new information when forming expectations. The second is meaning. For infrequent events, if people have recently observed such events, then people tend to overestimate the probability of such events in the future. For example, if the news of a recent plane crash is frequently spread by the media, people will overestimate the probability of future plane crashes.

Significantness may make investors overreact to new information. The third is conceit. People are very conceited about their abilities and knowledge. For example, when people say that there is a 90% probability that it will happen or that the statement is true, then the probability of such an event is less than 70%. Conceit may make investors slow to respond to new information. The fourth is anchoring. Psychologists have proved that when people make quantitative estimation, their estimation judgment may be seriously affected by the pre-project value. For example, sellers of used cars usually pay a high price at the beginning of negotiations and then reduce the price. Sellers try their best to keep consumers high. Anchoring makes investors slow to respond to new information.

Second, regret.

After human beings make mistakes, they often regret it, instead of looking at such mistakes from a farther background, and they will severely blame themselves. Regret theory helps to explain that investors delay selling stocks with reduced value and accelerate selling stocks with increased value. Shefrin and Statman point out that the theory of regret shows that investors avoid selling stocks with reduced value because they don't want their mistakes to come true, so as to avoid regret, while investors sell stocks with increased value to avoid regret caused by possible price reduction.

Third, cognitive dissonance.

Cognitive dissonance is a kind of psychological and intellectual conflict, which people will experience when they are told that there is evidence that their beliefs or assumptions are wrong. According to the theory of cognitive dissonance, people tend to take actions to alleviate the cognitive dissonance that has not been fully rationally considered: people can avoid new information or develop distorted arguments to keep their beliefs or assumptions correct. For example, new car buyers selectively avoid reading advertisements of their other models and go to see advertisements of their chosen models.

Fourth, avoid losses.

Pursuing advantages and avoiding disadvantages is one of the main motives of human behavior, but right? Profit? With what? Avoid harm? The choice in economic activities is to consider how to avoid losses first, and then how to gain benefits. Research shows that people give? Avoid harm? What is the consideration weight of factors? Profit? Twice the factor.

Fifth, the herd effect.

The interaction between people plays a great role in the change of people's preferences, and the pursuit of fashion and blind obedience are the most prominent characteristics. This has a special influence on the formation and change of economic decision-making. In the field of financial investment, people often have obvious and irrational psychological characteristics and behaviors of conformity.

(B) the general characteristics of decision-making behavior

From 65438 to 0994, Shefrin and Statman began to study the characteristics of decision-making behavior that may have a systematic impact on financial market behavior. Behavioral financiers have realized that some characteristics of decision-making behavior are the basic assumptions of decision makers:

First, the preferences of decision makers are varied, and their preferences are often formed in the decision-making process;

Second, decision makers are flexible, and they choose decision-making procedures or technologies according to the nature of decision-making and the different decision-making environment;

Third, the decision-maker pursues a satisfactory scheme rather than an optimal one. Although the interaction characteristics between these decision-making characteristics and their influence on the market are not very clear, empirical research shows that the characteristics of investors' decision-making behavior are related to the investment characteristics in the market, such as excessive fluctuations in stock prices and bubbles in prices; There are follow-up and conformity behaviors among investors; Selling profitable investments too early and selling failed investments too late; Asset prices overreact or underreact to new market information, etc.

Second, the practical application of behavioral finance in the securities market

The specific application of behavioral finance in securities market investment can be divided into defensive strategy and offensive strategy. Defensive strategy refers to the analysis of people's investment psychology and decision-making characteristics by using behavioral finance to control psychological deviation and cognitive errors, that is, to avoid investment mistakes; Offensive investment strategy is to make corresponding investment strategies on the basis of understanding the influence of investors' psychological deviation and decision-making mistakes on the market, so as to profit from them.

It is more realistic for individual investors to adopt a defensive investment strategy. Individual investors are at a disadvantage in financial strength, analytical means and information acquisition and grasp, so they often rely on gossip as the basis for decision-making and often behave irrationally. In addition, individual investors are responsible for their own funds and lack of monitoring system from the third party, which leads to psychological deviation and misunderstanding in the investment process of individual investors, and it is necessary to adopt defensive behavioral financial investment strategies to guide investment. Aggressive investment strategy is generally adopted by institutional investors, because it is very difficult to judge the pricing of securities in complex financial markets, and it is also difficult for individual investors to judge whether the current market pricing is correct or deviated in practice. Only professional investors with a lot of information and good analytical skills can make judgments. In addition, the scope and duration of various pricing errors or deviations are limited, and individual investors have limited energy and high transaction costs, so they cannot make use of these deviations and errors to make profits.

Defensive behavioral finance investment strategy is to use a series of behavioral finance knowledge to introspect and judge your own investment behavior, which can include: first, check the source of information, verify the credibility and effectiveness of information, pay close attention to whether there is any updated news or digital disclosure recently, and avoid focusing only on information that supports your own views. Second, judge whether you are overconfident, especially since your investment behavior has achieved a series of successes recently. Third, we should be good at comparing the pros and cons, and find out who is the most optimistic about the market, who is the most pessimistic, and why we hold such a view. Fourth, irrational expectations caused by anchoring effect should be avoided.

For institutional investors, it is more important to adopt a positive investment strategy. All kinds of investment institutions are operated by investment managers. Investment managers, like individual investors, will also have various psychological deviations and cognitive errors in investment decision-making, so defensive investment strategies are needed to avoid them. But investment managers have good financial investment expertise and rich practical experience, and they can better control their own behavior. In all kinds of institutions, there are generally good management supervision systems and risk management measures, which can also help investment managers avoid psychological deviation and cognitive errors to a certain extent. Therefore, for institutional investors, it is more important to use offensive investment strategies to make profits.

Third, the theoretical discussion and practical application of behavioral finance

First, the reverse investment strategy.

The reverse investment strategy is to buy stocks with poor past performance and sell stocks with good past performance for arbitrage. This strategy was originally put forward based on the empirical study of DeBondt and Thaler( 1985, 1987) on the overreaction of the stock market. Behavioral finance theory holds that investors often pay too much attention to the recent performance of listed companies in actual investment decisions, and predict their future according to their recent performance, which leads to persistent overreaction to the recent performance, which leads to overvaluation of the stock prices of poor companies and excellent companies, and finally provides arbitrage opportunities for reverse investment strategies.

Second, the momentum trading strategy.

Momentum trading strategy is an investment strategy that pre-sets the filtering criteria of stock returns and trading volume, and buys and sells stocks when stock returns or trading volume meet the filtering criteria. The momentum trading strategy in the sense of behavioral finance comes from the study of the continuity of intermediate returns of stock prices in the stock market. When Jegadeesh and Titman( 1993) studied the intermediate income of asset-stock portfolio, they found that the intermediate income of stock portfolio constructed at intervals of 3 to 12 months showed continuity, that is, the intermediate price had momentum effect that changed continuously in a certain direction. Rouvenhorst( 1998) found similar intermediate price momentum effect in another 12 countries, indicating that this effect does not come from data sampling deviation.

Third, the cost average strategy and time dispersion strategy.

Cost-average strategy means that investors buy securities in batches at different prices according to a predetermined plan, so as to reduce the cost when the price of securities falls, thus avoiding the greater risks that may be brought by one-time investment. Time dispersion strategy means that the risk of investing in stocks will decrease with the extension of investment period. It is suggested that investors can invest in stocks in a large proportion when they are young, and gradually decrease with age.

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