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A Conceptual Model of Investor Behavior

55 Pages Posted: 12 Jun 2008  

Milan Lovric

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

U. Kaymak

Erasmus University Rotterdam (EUR) - Faculty of Economics - Department of Computer Science; Erasmus Research Institute of Management (ERIM)

J. Spronk

Erasmus Research Institute of Management (ERIM)

Date Written: 23 2008 6,

Abstract

Based on a survey of behavioral finance literature, this paper presents a descriptive model of individual investor behavior in which investment decisions are seen as an iterative process of interactions between the investor and the investment environment. This investment process is influenced by a number of interdependent variables and driven by dual mental systems, the interplay of which contributes to boundedly rational behavior where investors use various heuristics and may exhibit behavioral biases. In the modeling tradition of cognitive science and intelligent systems, the investor is seen as a learning, adapting, and evolving entity that perceives the environment, processes information, acts upon it, and updates his or her internal states. This conceptual model can be used to build stylized representations of (classes of) individual investors, and further studied using the paradigm of agent-based artificial financial markets. By allowing us to implement individual investor behavior, to choose various market mechanisms, and to analyze the obtained asset prices, agent-based models can bridge the gap between the micro level of individual investor behavior and the macro level of aggregate market phenomena. It has been recognized, yet not fully explored, that these models could be used as a tool to generate or test various behavioral hypothesis.

Keywords: investor behavior, financial decision making, behavioral finance, cognitive modeling, agent-based artificial financial markets

JEL Classification: G3, M, G39

Suggested Citation

Lovric, Milan and Kaymak, U. and Spronk, J., A Conceptual Model of Investor Behavior (23 2008 6,). ERIM Report Series Reference No. ERS-2008-030-F&A. Available at SSRN: https://ssrn.com/abstract=1144293

Milan Lovric

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

Burg. Oudlaan 50
Rotterdam, NL 3062 PA
Netherlands

Uzay Kaymak (Contact Author)

Erasmus University Rotterdam (EUR) - Faculty of Economics - Department of Computer Science ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Jaap Spronk

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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