Not a valid market -- An Introduction to Behavioral Finance

Author: Andrei Shleifer
Publisher:
Publish Date: 2003-06-01
Features: This book comprehensively introduces the fundamentals of behavioral finance. It is also an introductory work on behavioral finance written by a master of the field, undoubtedly an essential read for gaining a thorough understanding of behavioral finance. It is believed that the publication of the Chinese edition will further promote the popularization and dissemination of behavioral finance, an academic field in which Shleifer has devoted a great deal of effort to organizing. In the past 30 years, the Efficient Market Hypothesis has been the core proposition of financial theory. According to this theory, whether because all investors are rational or because arbitrage eliminates price deviations, the prices of securities in financial markets must equal their fundamental value. This book presents a completely new approach to studying financial markets: the behavioral finance theoretical analysis method. This method first points out that assuming investors are all rational and that arbitrage can fully realize its effects severely violates psychological principles and is fundamentally unworkable. In real financial markets, those who trade with arbitrageurs are not completely rational investors, and the arbitrageurs themselves are limited by risk aversion, limited operational time, and agency problems. This book proposes and tests some theoretical models for such non-efficient markets. Behavioral finance models, based on available financial data, not only provide better explanations than the Efficient Market Theory but also propose new empirical testing and predictive methods. These models can explain various so-called anomalies, such as achieving higher returns by investing in undervalued stocks, the closed-end fund puzzle, the rapid increase in stock returns after being included in an index, the sustainability of stock price bubbles, and even the collapse of several famous hedge funds in 1998. By reviewing and expanding the research on behavioral finance theory, this book provides a new theoretical framework and a basic framework for conducting empirical tests to analyze real-world financial markets.