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Sample Essay on Investor Behavior

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Sample Essay on Investor Behavior

Investor Behavior

There are a number of theories that help understand human emotions and how they influence them on the decisions they make on investments. Herding is among other behavioral finance theories that affect investor decision. Some investors usually base their investment decisions on the popularity of the particular stocks. In such situations, an investor who makes decisions with this respect, usually do not feel the loss when they lose money on such popular stocks (Lawrence and Chad, 2011, p. 279).

            The herd behavior theory has been applied for a long time by various investors and has attracted more of new investors into making investment decisions applying the theory. This certainly happens since potential investors usually find current investors in a particular market and observe that they have enough security on what they invest in and they tend to follow the same market ignoring getting private information, perhaps from market experts. However, some market researchers argue that herd behavior would make worse the stock price fluctuation and crash the market stability, while others argue that it would deduct stock price fluctuation and stabilize the market. (Qi, Shen and Dou, 2013, p. 528). This is because, studies have shown that investors who make decisions without considering getting major market information from the professionals, will affect the market either positively or negatively. However, most herding behavior investors, tend to apply this theory mostly when the market is falling and the volume of trade is high.

            In an efficient market in response to new information, the prices in the market vary where they can be greater than or less than the true value of the investment. The market due to this becomes efficient because the claims that there are no chances of beating the market in an efficient market, brings in profit maximizing investors who find ways of ensuring that they beat the market and eventually make it efficient. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

International Conference on Industrial Engineering and Engineering Management, Qi, E., Shen, J., & Dou, R. (2013). The 19th International Conference on Industrial Engineering and Engineering Management: Assistive technology of industrial engineering. Berlin: Springer.

Lawrence, J., & Chad, J. Z. (2011). Principles of Managerial Finance 13th Edition. New Jersey: Prentice Hall Publisher.

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