Summary analysis of investor cognitive biases

Abstract: This paper introduces the definition of cognitive bias, causes and characteristics, combed the area of ​​cognitive bias related to the results of theoretical and empirical research, on this basis proposed a follow-up study of the prospects.

Keywords: behavioral finance, bounded rationality cognitive bias

Modern cognitive psychologists believe that cognitive bias on the economic behavior of individual economic decision-making influence is universal, and often play a central role behavioral finance is that the uncertainty in the financial decision-making and a more dynamic, investors cognitive bias may be more significant, the study of various cognitive biases of investors makes sense. cognitive biases explain the research and findings can not be explained by traditional finance market vision provides a feasible way, the development of behavioral finance for the foundation.

1. Cognitive biases and vision financial markets
Into the nineties, the study of financial markets on the emergence of a lot of contradiction with the efficient market hypothesis, the statistical vision, in the history of stock returns and the predictability side, the view according to the weak efficient market, investors can not use of historical price information to construct investment strategy to reap excessive profits (asset pricing model in accordance with risk-adjusted future returns. Since 1980, many studies have found that stock returns are predictable evidence, for example, De Bondt and Thaler (1985) found long history of cumulative stock returns and future stock returns of long-term negative correlation structure based on the investment strategy of this phenomenon can obtain excess returns, a phenomenon called "long-term reversal". Jegadeesh and Titman (1993) studies have shown that the mid-stock Historical Statistics of the medium-term earnings and future stock returns are related, based on the structure of the investment strategy of this phenomenon can also get excess returns, a phenomenon called "mid-term inertia." facing traditional financial markets can not explain the vision, behavioral finance from psychological point of view, under conditions of uncertainty from the human cognitive bias starting to explain the anomalies in the market made a significant contribution.

2. Definition and Classification of cognitive bias
The psychological research applied to the investment decision-making through a long process. In the paper the first time since Slovic psychological factors demonstrated the impact of investment decisions, to De Bondt and Thaler officially opened the prelude to the development of behavioral finance, cognitive bias research and development has experienced rapid growth to slow germination process. In the late 1980s to the 1990s, many scholars in the fields of finance (such as: Roben Shiller, Richard Thaler.Meir Statman, Hersh Shefrin, and De Bondt and so on with psychology on the individual behavior of decision-making research results, research in cognitive bias a lot of work for the development of behavioral finance has laid a solid foundation. the concept of cognitive bias as the core areas of behavioral finance, cognitive psychology originated in accordance with Experimental analysis of cognitive psychology, information processing capacity of individual limitations, so individual judgments and decisions will have a bias (Tversky and Kahne-man, 1974). This kind of understanding and consistent point of view of evolutionary psychology, that natural selection The results will gradually degenerate into a people on a limited rational decision-making instead of rational decision-making process of the thinking subject, and accordingly to save the cost of thinking < Cognitive psychology that human cognitive processes can be seen as the human brain's information processing, therefore, cognitive bias, can be carried out according to four aspects of cognitive order they appear in the classification, namely, information identifying - information editing - information output - feedback. Wang Ning, Ning Mao (2005) by cognitive information processing in the literature 26 kinds of common cognitive bias in accordance with the process of human information processing is divided into the following categories: stage 1 information to identify deviations: easy to get sex bias, on behalf of bias, cultural and social awareness, a small number of theorems, cognitive disorders, herd mentality, over-reaction, the editing stage of information search costs .2 error: frame dependence, conservative bias, ambiguity aversion, unrelated effects, magical thinking, and quasi- magical thinking, and anchoring and adjustment .3) information evaluation phase bias: overconfidence, hindsight, the original Fu effect, to determine the effect, reflection effect, regret aversion, attribution bias, human gambling, loss aversion, places the money effect, disposition effect. Li Xin Dan (2003) for the characteristics of China's stock market to make policy-dependent bias.

3. The theory of cognitive bias
In the study of cognitive bias on the basis of the birth of a number of important behavioral finance model, explain the vision of financial markets provides a new way. Barberis, Shlefer and Vishny (1998) based on conservatism, inspired by the two representative cognitive bias on the basis of established BSV model, that the role of conservative bias, investors gain a single accident caused by inadequate response to the phenomenon of inertia in the decision ghostwriter bias the trend mode is in effect, with the proceeds of a series of excessive reaction, leading to long-term reversal phenomenon. Daniel, Hirshleifer, and Subrahmanyam (1999) in the over-confidence and self-attribution bias, based on the structure of the DHS model, private information that investors over the accuracy of self-confidence, public information role of self-attribution bias, overconfidence makes increased, the two together, produced a short-term phenomenon of inertia. Inertia is the result of short-term price deviations from fundamentals from the long term, prices will gradually disappear deviation, and the emergence of long-term reversal. Hong and Stein (1999) proposed HS model, which did not specify, but also implies Mining by conservative thinking, inertia representation of traders deviation model assumes that there are two rational investment agents, and information mining are an inadequate response to new information, inertial traders aware of this lack of response, and until the over-reaction, which leads to medium and long-term reversal phenomenon inertia. Barberis, Huang and Santos (2001) proposed BHS model, based on loss aversion and the effect of cognitive bias places the money they in the traditional consumption-based pricing model places the introduction of loss aversion and money effect, produced a change in risk aversion. the price rises, investors' risk aversion to reduce the price to be pushed further. lower prices, making the rise in investor risk aversion, so the price is further suppressed. Links to Research papers Download

4. Empirical study of cognitive bias at home and abroad
Kenneth L Fisher and Meir Statman (2000) carried out by the investors within one month of income and emotional changes related to the month of the study which found that Standard & Poor's (S & P500) index returns for each 1% increase in individual investor sentiment following the change of 1%, while stock analysts who follow the changes of mood 0.98% while the stock price Research Center (CRSP) index for each 1% increase in income, changes in individual investor sentiment following the 0.67%, stock analysts who are also changes in mood 0.67%, earnings history between rate and investor sentiment showed a significant positive correlation. This correlation suggests that investors are on the market to determine the impact of historical yield data, that investors in the market to judge the existence of anchoring effects.

Odean by nearly 8,000 investor accounts data, empirical analysis, found that retail investors will sell shares soon after buying another stock, but the first year when the average transaction costs, if not, they sell out of stock than to buy the stock performance is better, thus verifying the existence of overconfidence.

On the domestic front, Pengxing Hui, Wang Xiaohong (1995) earlier analysis of the use of survey methods, the Shanghai stock investors involving individual investor behavior and psychological differences in the characteristics of research whose findings show that: behavior expose small investors many investors, so a single portfolio. Li Xin Dan (2002) for the conduct of China's stock market investors had systematically studied by the "Investor Behavior psychology experiment", "investors trading accounts Empirical tests" and " Investment Behavior Survey "and found: on the investment behavior of investors in our country there are many cognitive biases, mainly by the" psychological certainty "," loss aversion "," hindsight "," overconfidence " "excessive fear", "policy psychological dependence", "rich-quick mentality", "gambling mentality", "herd mentality", "typical deviation", "acquired bias," "emotional bias", "psychological anchors , "" selective bias "," conservative bias "and" framing effect "and so on.

Mao Ning, Ning (2008) to build a rational investor behavior mechanism of limited structural equation model of Chinese small and medium investors an empirical test that cognitive biases, decision-making bias and performance differences exist between the turn of the progressive cause and effect relationship. Raoyu Lei, Liu Dafeng has in his book <<Behavioral Finance>> a book on the April 2001-January 2002 the 10 months, China's institutional investors, anchoring behavior of an empirical study The study concluded that one week within the Shanghai Composite Index rose for every 1% brokerage sentiment index rose 10.014qo. which shows that our institutional investors in the market to judge the existence of anchoring behavior.

5. Prospects for future research
1) From the quantitative point of view, the current behavioral finance research has confirmed the existence of more than 30 kinds of psychological bias, but more focused on the analysis of the U.S. securities markets due to the complexity of cognitive processes and the limitations of research tools may there are a lot of psychological bias has not been proven the same time, due to market conditions, trading systems and cultural traditions of the differences, even with a psychological bias, in a different market, different investors, who may also exhibit greater differences, therefore, future research can be how to simplify complex cognitive bias, systematic, and localization efforts.

2) From the research point of view, the existing literature focuses on individual cognitive bias in repeated discussions and the existence of the test, the lack of the organic integration of a variety of psychological bias up a unified framework and research system, while the existing cognitive biases involved, there are more repeat of the same cognitive biases are often due to different research scholars, research data and market conditions have been given different names, a number of cognitive bias is often referred to with different names and their meaning and its significance is similar, the lack of a unified classification system and naming standards would be a systematic cognitive bias, cognitive bias based on the establishment of a unified pricing model, is an important future direction of behavioral finance research.

[1] Hirshleifer, lnvestor Psychology and Asset Pricing [J], Joumalof Finance, 2004.56.

[2] Shefrin, Beyond Greed and Fear [M], MA Boston: HarvardBusiness School Press. 2001.

[3] Thaler, Behamoral Economics [Z], NBER Working Paper (7948) .2000.

[4] Mao Ning, Ning, limited rational behavior of individual investors, the mechanism of empirical research [J]. Management Science, 2008 (2) :91-99. Links to free download

[5] Pengxing Hui, Wang Xiaohong, Shanghai investor behavior and personality characteristics of Yin, Psychological Science, 1995, (18).
[6] Li Xin Dan. Behavioral finance theory, the study system and Prospects [J]. Financial Research, 2005, (1).

Links to free download

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