01 August 2011

Behavioral Finance

Behavioral Finance is one of the subjects in CFA level III course. Its objective is to highlight to us about the imperfection of the traditional investment theory - that it assumes that everyone receive same and complete information and react to achieve the maximum return given the same risk tolerance level. It mentions that everyone has his/her different opinion on the market movement and has the constraint to react to the new information given the restricted period.

Let me give you the example of why it is not perfect in the market. There are thousand of investors in the market to seek for the maximum return in different time horizon. For speculator, they always seek for the highest return in shortest period, but for investors, they always look at the highest return for a longer time frame. Of course, there are also some investors/speculators react nothing to the new information as they may not receive the new information on time or they do not have any clue on the new information given to the public. It can be explained by the volatility of the market due to different interpretation of different people in the same market.

What I would like highlight is that, since everyone has its different investment objectives in the market, hence there is always a 'buyer' and 'seller' in the market to match the deals, if not we will not see a deal in the market, as it could be in the bear market (no one would like to sell at the lowest price and no one would like to buy at a higher price). So, from the observation, we as a long term investors who have the long term holding power should start accumulating the stock when the market bottom up (means that there will be a long time frame that no or little market movement/volume).

P/S: Above are all my personal opinion without any fact given. Please advice your investment adviser before making any investment decision.

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