Market Inefficiencies and Behavioural Influences

Kok Loang Ooi
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Kok Loang Ooi: University of Malaya

Chapter Chapter 8 in Demystifying Behavioral Finance, 2024, pp 105-111 from Springer

Abstract: Abstract Chapter 8 examines the extensive effect of behavioural factors on market inefficiencies, investigating how cognitive and emotional biases lead to systematic departures from rationality in financial markets. This chapter analyses anomalies like momentum investing, the small-firm effect, and the disregard for long-term fundamentals in high-volatility equities, illustrating how these phenomena contradict the core tenets of the efficient market hypothesis. The chapter elucidates how psychological shortcuts and emotional reactions, using behavioural finance theories such as anchoring bias, representativeness heuristics, and constrained rationality, skew investor decision-making. It examines the influence of herding behaviour and overreaction in establishing feedback loops that distort asset prices from their intrinsic values, resulting in extended durations of market mispricing. The chapter also examines cultural and institutional variables that either intensify or alleviate these inefficiencies, offering a comparative examination of worldwide marketplaces. Chapter 8 emphasises the persistence of market inefficiencies and their consequences for investment strategy and financial policy via empirical evidence and theoretical integration. It promotes the integration of behavioural insights into asset pricing models, portfolio management strategies, and regulatory frameworks to more effectively tackle the psychological and structural factors contributing to inefficiencies. This chapter provides a thorough analysis of these events, enhancing the formulation of more inclusive financial theories that include the interaction between rationality and behavioural factors in determining market results.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-981-96-2690-8_8

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DOI: 10.1007/978-981-96-2690-8_8

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