Do Investors Behave Rationally?

Abstract

Behavioral finance is a field in economics that has in recent times become a subject of significant attention to investors. This paper provides a general discussion of behavioral Finance .In this paper, a survey is made between two different groups of investors. This paper shows how we act or the psychology when we make decisions involving risk, or in the opportunity of loss. This paper also throw some light on economists who stress emotional and behavioral elements of stock-price fortitude challenge efficient market theory. Investors behave irrationally during risk decisions such as:

Trailing Money - Individuals typically measure risk by money that has been lost. These losses are measured against the original cost of the stock or bond. Individuals sometimes feel money has been lost only when the security is sold.

Unknown Instruments - Unknown or complex securities may appear riskier. Previous Losses in Familiar Instruments- a stock that has lost money for the individual in the past is considered unappealing.

Dissimilar Investing - Not 'following the crowd' may appear risky to an individual Historical v Potential Levels of Risk - Many individuals regard past levels of volatility as more important than projected levels of risk.

Keywords: investors, behaviour, rational, irrational, finance, decision, risk, emotional