Behavioral finance finds that people are not completely rational in the decision-making process under uncertain conditions, and will be influenced by beliefs such as overconfidence, representativeness, availability, frame dependence, anchoring and adjustment, loss avoidance and so on, resulting in systematic cognitive bias. Modern finance is based on the hypothesis of rational man, which holds that the decision of rational man under uncertain conditions is made in strict accordance with the expected utility function calculated by Bayesian law; Even if some people are irrational, this irrationality is not systematic and will cancel each other out, thus being rational as a whole; If these mistakes can't completely offset each other, the arbitrageur's arbitrage will also eliminate these wrong decision makers, so that the market will return to equilibrium and achieve overall rationality.
Behavioral finance replaces the expected variance theory of traditional finance with the prospect theory of Kahneman and Tversky (1979+0979), and expands the hypothesis of "Chicagoans" to the hypothesis of "KT people" (referring to the actors in Kahneman and Tversky's prospect theory), which is not only a challenge to traditional finance, but also a challenge to the theoretical basis of economics. However, the prospect theory of behavioral finance has not yet become a unified theoretical basis and axiomatic standard. Different researchers usually build their own models and theories based on specific psychological assumptions. This makes it impossible for different researchers of behavioral finance to discuss under axiomatic standards, thus limiting the scientific nature of behavioral finance. To establish a complete system of a subject, we should not only "break" but also "establish". Behavioral finance needs to establish a core theoretical framework similar to the position of efficient market hypothesis in traditional finance on the basis of forming new and standardized assumptions about actors, as the analytical basis of financial market phenomena and human behavior.
Without the core basic theory and unified new hypothesis, the discipline system cannot be complete and unified internally, it is impossible to reconstruct the theory of asset pricing and corporate finance, and it is impossible to establish an independent discipline with characteristics. We believe that the new basic theory should be closer to the market reality under the premise of relaxing the hypothesis of rational person, and the old theory should be included as a special case of the new theory. It is necessary to establish a unified and unique paradigm of strict logical analysis.
As a discipline, there must be a unique analytical paradigm different from other disciplines. For example, information economics is based on moral hazard and adverse selection, and institutional economics is based on Coase theorem. Behavioral finance is characterized by applying the research results of cognitive psychology to the analysis of investors' behavior, but there is no strict internal logic system at present. For example, what kind of psychological factors affect the emergence of a financial phenomenon? What psychological factors have a fundamental or decisive influence on investors' behavior? What is its influence mechanism? Whether this mechanism will disappear with people's understanding and so on.
For example, the explanation of the two interrelated phenomena of "overreaction" and "underreaction". Barberis, Shleifer and Vishny( 1998) introduced representativeness and conservatism, while Daniel, Hirshleifer and Subramanyam( 1998) introduced overconfidence and self-attribution. Hong and Stan (1999) explained it from the interaction mechanism between trend traders and arbitrageurs. There are many completely different explanations for a phenomenon in a discipline. What kind of psychological factors are dominant, what is the relationship between influencing factors, and what is the transmission mechanism? There is still no good explanation that there is no normative and axiomatic standard for the hypothesis of the actor, and the basic theory of this discipline is not reliable. It also shows that behavioral finance has not yet established an analytical framework with strict internal logic.
At the same time, the above model can't explain why there are positive reactions to some events, such as the announcement of financial report (BernardThomas, 1990) and dividend distribution (Michael YTHALERWACK, 1995). However, there are negative reactions to other events, such as the listing of new shares (DharanIkenberry, 1995) and the dispute over agency rights (IkenberryLakonishok, 1993). Fama (1998), a staunch supporter of the Efficient Market Hypothesis, believes that these so-called anomalies are caused by accidental factors, and the resulting anomalies are randomly distributed between overreaction and underreaction, which accords with the Efficient Market Hypothesis. It is precisely because there is no unified analytical framework with strict internal logic that behavioral finance cannot respond effectively to "Fama Criticism". A new behavior-based core model needs to be established.
Although behavioral finance has achieved rapid development, it cannot overthrow the core foundation of modern finance because of the lack of core asset pricing model based on its basic theoretical framework. For example, in the debate on whether the market is efficient, modern finance is not at a disadvantage in the debate because of its strict internal logic system and the continuous development of asset pricing theory.
Fama (1970) believes that the test of market effectiveness must be a joint test of expected returns. Fama (1998) thinks that the phenomena of under-reaction and over-reaction are caused by model problems and technical problems. The model is not good because the original CAPM model does not reflect all risks, and the model prediction has systematic deviation. In the restricted bad model, Fama, Fisher, Jensen and Roll( 1969) use the market model to study the influence of company-specific events on market prices, and create a new research method of event analysis. Fama and French( 1996) established a three-factor model to replace CAPM model. On the technical issues, the main controversy is whether to adopt cumulative excess returns (CARs) or buy and hold excess returns (BHARS); Statistical deviation; Whether to use value weight or equivalent weight. Fama's conclusion is that if we use different asset pricing models to measure returns and adopt different statistical methods, these so-called long-term return anomalies will disappear and the market will still be effective. Although Shefrin and Statman( 1994) established a behavioral asset pricing model (BAPM) and extended the β value in CAPM to the sum of the noise trader risk and the traditional β value, the model was not widely accepted because the noise trader risk was difficult to measure. Because there is no core behavior-based asset pricing model in behavioral finance, when testing market efficiency, we can only explain the ineffectiveness of a specific market during the testing period through empirical evidence, but can't describe the market in theory to explain the pricing mechanism of financial assets. The core model of future behavioral finance may be a model that organically combines limited arbitrage theory with investors' irrational psychological beliefs based on prospect theory.
Only by establishing a new behavior-based asset pricing model can we change the fact that behavioral finance has more empirical evidence, fewer core theoretical models and lacks explanatory power; The present situation of more description, less quantitative analysis and poor guidance; Only in this way can we promote the test of market effectiveness and respond to Fama's criticism (1998). If the asset pricing model based on behavior is not established, the limitations of the core theory of modern finance cannot be fully explained theoretically and empirically, and behavioral finance cannot be widely recognized. It is necessary to establish clear research objects and methods.
The position and function of psychology and its research methods in behavioral finance need to be clear, which determines whether behavioral finance belongs to economics or a branch of psychology. Generally speaking, psychology is the study of human psychology, while behavioral finance is based on the research results of cognitive psychology on human decision-making under uncertain conditions, and studies the influence of human psychology on asset portfolio and pricing. But what is the psychology of the actor, how and to what extent it affects asset portfolio and pricing. These problems are very complicated. In this new field, there are no mature achievements to be used, which brings difficulties to the development of the discipline and the determination of clear research objects.
The establishment of subject research object is the basis of the construction of subject theoretical system and framework arrangement. For example, international finance is an independent discipline that studies internal and external equilibrium goals from the perspective of monetary finance and understands problems at the same time. What is the research object of behavioral finance? Whether it is a discipline to explain people's actual behavior in the financial market, or a discipline to explain abnormal phenomena, or a discipline to explain financial market phenomena needs further discussion, so that the research of behavioral finance can have a clear main line. Only in this way can the discipline develop rapidly and make great innovations.
At the same time, many research methods of behavioral finance are experimental methods in experimental economics, and the nature, status and role of this research method in behavioral finance methodology need to be clear. Most of the methods used in behavioral finance are under the framework of traditional financial theory. Some of these methods are adapted to traditional financial theory, and some are based on traditional finance. Behavioral finance has established a new basic theory and analytical paradigm on the basis of new assumptions, which requires behavioral finance to innovate new research methods on the basis of its core theory to meet the needs of the new analytical paradigm and form a distinctive methodology.
After the research object and method of the discipline are determined, it is clear which theories belong to the research scope of the discipline and which theories do not belong to the research scope of the discipline, which also determines the research boundary of a discipline. The establishment of discipline research boundary will promote the establishment and rapid development of discipline. Need to have a clear research context and unique knowledge points.
After the research object and research method of behavioral finance are determined, the main line of its research can be clarified. The main line of research refers to the logical order between various research topics. What knowledge belongs to the basic knowledge, which belongs to the key theory, what is the relationship between topics, what is the logical system, and what kind of logical layer is developed step by step.
Any subject has its own unique knowledge points (including basic concepts and basic theories). For example, elasticity, indifference curve and consumer choice in microeconomics; Total supply, total demand and national income in macroeconomics. Behavioral finance has formed some unique knowledge points, such as prospect theory, limited arbitrage theory, noise trader theory, feedback theory, people's beliefs and psychology in decision-making, insufficient reaction and overreaction. However, it is still worth discussing how to link these knowledge points through the main line of research and arrange them reasonably to achieve the purpose of strict logic and clear organization. For example, limited arbitrage theory and investors' psychology and beliefs are the two most important theoretical pillars in behavioral finance, but the relationship between them is not clearly defined. For another example, the prospect theory puts forward three kinds of belief deviations: availability, representativeness, anchoring and adjustment. The relationship and logic between these basic knowledge points and knowledge points such as overconfidence, fuzzy avoidance and optimism are not very clear. The paradigm of behavioral finance needs to be further expanded.
Modern finance studies traditional financial assets, such as stocks and bonds.
While pricing, it also extends to the pricing of derivatives such as corporate financing and options. Behavioral finance has proved that investors' psychology and behavior have an impact on the prices of derivatives such as corporate activities and options, but it still needs further development to analyze the pricing of derivatives such as corporate activities and options with the theoretical system and analytical paradigm of behavioral finance.
For example, for the analysis of corporate finance, Shefrin and Statman( 1984) used behavioral finance to explain investors' preference for cash dividends, such as self-control, mental account and avoiding regret. Rolle (1986) gives the assumption that managers are arrogant about company merger. However, the behavior analysis in corporate finance is still insufficient. In traditional finance, investors are rational people, there is no difference, and the market is efficient, so the ——MM theorem, the core basic theory of corporate finance, appears, that is, under certain conditions, the company value has nothing to do with the capital structure. However, if investors are irrational and the market is ineffective, what impact will investors' different behaviors have on the company value under different conditions? Whether this influence will change the company's investment and financing decisions; And the mechanism of change; Whether the interaction between companies and investors will have an impact on the market and whether it will have an impact on the macro-economy, these issues need to be further explained in the context of expanding the paradigm of behavioral finance.
For another example, for the pricing of derivatives such as futures options, traditional finance has established binary tree model and Blackshaw model to price derivatives. Although Shefrin( 1999) analyzed the influence of investor sentiment such as frame dependence, reference point and heuristic deviation on option trading and price, he did not use the analytical framework of behavioral finance to establish a new derivative pricing model.
The above problems are the obstacles that behavioral finance must overcome as an independent discipline, and also the main exploration direction of researchers interested in behavioral finance in the future. In the case that these problems have not been well solved, it seems that it is not rigorous to describe this field with behavioral finance "learning".