Behavioural Finance theory argues that investor psychology plays an important role in capital markets. Shleifer and Summers (1990) and DeBondt (1998) report that the actions of noise traders and individuals in particular, have important implications for financial markets.
Critically discuss the above statement, making reference to existing academic literature.
Werner F.M. De Bondt, “A Portrait of the Individual Investor”, European Economic Review, 42, 1998, pages 831-844
Andrei Shleifer and Lawrence H. Summers, “The Noise Trader Approach to Finance”, Journal of Economic Perspectiues, Volume 4, Number 2, Spring 1990, pages 19-33
Werner F.M. De Bondt and Richard Thaler, “Does the Stock Market Overreact?”, Journal of Finance, Volume 40, Number 3, July 1985, pages 793 – 805
J. Bradford De Long, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann, “Noise Trader Risk in Financial Markets,” Journal of Political Economy 98 (August 1990), pp. 704–38
D. Kahneman and A. Tversky, “On the Psychology of Prediction,” Psychology Review 80 (1973), pp. 237–51
W. F. M. DeBondt and R. H. Thaler, “Do Security Analysts Overreact?” American Economic Review 80 (1990), pp. 52–57.
Brad Barber and Terrance Odean, “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment,” Quarterly Journal of Economics 16 (2001), pp. 262–92
N. Chopra, J. Lakonishok, and J. Ritter, “Measuring Abnormal Performance: Do Stocks Overreact?” Journal of Financial Economics 31 (1992), pp. 235-68.
D. Kahneman and A. Tversky, “Prospect Theory: An Analysis of Choice Under Risk,” Econometrica 47 (March 1979), pp. 263–91.
T. Odean, “Are Investors Reluctant to Realize their Losses,” Journal of Finance 53 (1998), pp. 1775–98.
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