Classical understanding of investor behavior - Investments

Classical understanding of investor behavior

The study of investment markets is based on modeling and testing factors that determine the dynamics of prices for investment assets and the behavior of individual investor groups. Most of the model designs describing the formation of prices for investment assets are based on a number of assumptions about the behavior of investors and markets in general. Traditional economic theory models investment markets (including financial ones) as the only possible equilibrium position that arises from the interaction of rational actors (players or "representative agents" of the market) that rely on the same information and perceive it equally.

The rationality of the investor's behavior is characterized by two properties:

1) when new information is received, representative agents in accordance with the rule of Bayes, include it in their representations and expectations. This suggests that the subjective probability distribution of unknown variables is objectively correct;

2) on the basis of the generated views, market participants accept "normatively correct" solutions that are not intrinsically contradictory and fit the theory of expected utility.

A rational investor predicts the future in a certain objective way and does not change his preferences for established investment goals that can be expressed in monetary terms. The rational behavior of the investor is characterized by making decisions in accordance with the theory of expected utility. Usually a rational investor is seen as an opponent of risk (in some models - as risk-neutral). the investor requires increasing compensation for greater risk (non-linear dependence of risk compensation).

Hypothesis of investor rational behavior - the assumption that most investors in the market make a choice in order to maximize their welfare (benefits) adequately their market information.

Modern research proves that such assumptions are always justified. Became popular "behavioral finance", or "behavioral economics", emphasizing the role of the human factor and a departure from rationality. Behavioral finance explains the impact of psychology on investment and financial decisions, and argue that investment choices are better explained when using models where not all participants are rational. D. Kahneman, who received the Nobel Prize in economics in 2002, defends the concept (theory of perspective), which rejects the fundamental economic postulate about the rationality of the behavior of market participants. The research of D. Kahneman and A. Tversky showed that people are not always guided by considerations of their own benefit that under the influence of various quirks or "complexes" (for example, the fear of appearing to be too gullible or if the problem can not be fully understood), market actors take decisions that are unreasonable from an economic point of view and are unprofitable for them.

Supporters of the traditional approach to investment decisions defend their case, arguing that even if some investors in the market do not act rationally, rational investors level their influence on asset prices over a long time period. High price instability is explained by asymmetry of information on the market.

The concept of a perfect market combines the competitive market and the market without the friction of rational investors. Competitive market is the market for a large number of sellers and buyers (for example, in the financial market - sellers and buyers of financial assets) where there are no restrictions on access to assets and no actions of market participants (buying or selling any number of assets ) can not affect the market price.

The market without friction includes many prerequisites for the creation and circulation of assets. First of all, there are no taxes (more correctly, disorganising taxes), there are no restrictions on trade (for example, in the financial market - uncoated securities), there are no transaction costs (to purchase information, search for a counterparty, conclude deals, etc.). In a perfect market, each level of risk corresponds to a certain required yield (in percent per annum), i.е. the hypothesis "risk-return" is fulfilled, and this rate is the same for borrowing and investing. Equilibrium in the market is observed when the required and actual (expected) returns are equal.

The real markets of investment assets differ in the degree of imperfection, the presence of "friction". The assumption of a perfect market is rather an approximation to reality (the desired benchmark) than an objective description. However, this assumption is constructive, since it allows us to understand the logic of making investment decisions in certain market conditions (often using the sequential introduction of certain imperfections) and use it fruitfully in developing investment recommendations.

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