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Some investors can be over-confident, while other less knowledgeable investors might be prone to herding effects.
However, as I have already mentioned, not all investors are rational. The efficient market theory is the idea that the market will ...
This is the main reason for some investors choosing option B. One reason for the irrational behaviour of some investors could be due to their own personal risk attitude.
This leads to the assumption that these investors are not rational as none of the market data or theory is being considered in their investment decision.
This leads into the area of behavioural finance to try to explain the actions of these investors.
Behavioural finance attempts to incorporate elements of psychology into finance to better understand investor behaviour.
Essentially, behavioural finance operates under the assumption that all investors are not rational.
A good quote to sum up behavioural finance is provided by Shleifer (2000) who observes that, ‘at the most general level, behavioural finance is the study of human fallibility in competitive markets.’ ... It was based on these theories that Glasser developed Choice Theory (Sharf, 2004) Choice theory provides an explanation of motivation which is ...
believe and that we are responsible for the choices we make.
As observed by Shleifer (2000) ‘At the most general level, behavioural finance is the study of human fallibility in competitive markets.’ Behavioural finance incorporates elements of cognitive psychology into finance in an effort to better understand how individuals and entire markets respond to different circumstances.
Behavioural finance is based on the principle that all investors are not rational.