The influence of psychology on investment behavior - Investments

The influence of psychology on investment behavior

Selection of investment options within a particular theory (model) is built on certain assumptions about the behavior of individuals (for example, rationality), and is described by a number of axioms. The result of this consideration is the regulatory requirements for the individual to make decisions: how to proceed in a particular situation (for example, when identifying losses from an investment decision).

The process of making any decision under uncertainty is conditioned by two interrelated aspects: objective factors of the external environment change and subjective notions about what is happening. And the objective uncertainty, and subjectivity of the world perception by the investor are fundamentally important for understanding investment choice. The effect of objective factors is observed by investors and forms experience, but since this experience is often not representative for analytical conclusions from the point of view of statistics, the subjective evaluation with all problems of psychological perception begins to prevail.

Historical excursion

The psychological theory of decision-making under conditions of uncertainty began to develop actively in the United States from the mid-1950s. At the first stage, the professions attracted the greatest interest from the researchers, whose representatives often have to make subjective decisions with a high degree of risk (for example, brokers in financial markets). The most famous works of the late 1960s. belong to P. Slovich (1969, 1972). By the 1970s. include the well-known works of A. Tversky and D. Kahneman (Tver- sky & Kahneman, 1974, 1979). By the early 1980's. (Shiller, 1981, 1984) and the joint work of H. Shifrin and M. Statman ( Shefrin & Statman, 1984). Schiller on statistical data showed that the price of shares can not be regarded as a given dividend estimate. Over the past 100 years, the present value of dividends was almost constant, and stock exchange prices were very volatile. In the work of Shifrin and Statman, the "dividend puzzle" resolved through the behavioral explanation of choice. In a 1984 paper, Schiller showed that fashion has a significant impact on financial markets.

Since the mid-1980s. there appeared a large number of works that demonstrate various anomalies in the financial market, in the investment behavior of individuals and companies. In 1984, the American Financial Association included a section on behavioral finance. By the end of the 1990s. Behavioral finance has become the most popular area of ​​research in finance and investment. The most interesting work in the field of research on the inefficiency of financial markets belongs to Andrei Shleifer, a professor at Harvard University.

To date, behavioral finance ( behavioral finance) form four areas of research: 1) the identification of heuristic errors in decision-making; 2) studying the influence of the external environment or the form ("framing") on investment behavior; 3) theory of prospects as a theory of investment choice in conditions of uncertainty; 4) inefficiency of financial markets and testing of the hypothesis of adaptive markets.

It has been repeatedly observed that there are situations in which the vast majority of people make decisions irrationally, contrary to common sense. There are studies that prove the emotional color of money, when, depending on the direction of investment, the perception of the financial result varies.

An important factor is the already existing number of benefits. Daniel Bernoulli, an outstanding mathematician, first described the decision-making process under conditions of uncertainty. His thesis: "Satisfaction from any small increment of wealth will be inversely proportional to the amount of already existing good." According to a number of modern researchers, when the per capita income level reaches over $ 20,000 GDP per year, consumer and investment behavior in the country is changing. These studies prove the need to take into account in investment behavior a reaction to the change in the achieved level of well-being. Turning to psychology, supporters of the "behavioral economics" prove that the human psyche perceives not so much the absolute value of its wealth, as much progress in it, and the joy of winning is much less the bitterness of losing. Losses always seem more significant than equivalent increased income. Similar studies and assessments of perception barriers are actively used by consultants to build motivation and reward systems.

The more incomplete, contradictory information about the future (in some cases there is an excess of information that is difficult for the investor to systematize), the more the intuition and the experience gained in the decision-making process prevail. Since intuition essentially depends on the psychological characteristics of the person making the decision, the understanding of the value of the result and the attitude to risk are distorted in comparison with the rational logic of behavior. Researchers note age and gender differences in investment behavior.

Basic rational behavior axioms:

1) receiving new information, individuals rationally (in accordance with the Bayes rule) include it in their representations and estimates;

2) on the basis of formed representations and assessments, individuals make decisions that are internally consistent and consistent with the theory of expected utility;

3) A rational investor is an opponent of risk (risk averse). He prefers in two possible situations (certainty and risk) a guaranteed result of a risk situation in which there is a probability of obtaining a greater gain, but the expected value is guaranteed in the first option. For greater risk, the investor will demand compensation in the form of increased benefits.

The utility function of the monetary result within the framework of the expected utility theory of Newmann and Morgenstern always and everywhere is convex, as shown in Fig. 6.1.

Classical understanding of the utility function of the investor (growth from any point of monetary gain leads to an increase in utility for the investor)

Fig. 6.1. The classic understanding of the utility function of the investor (growth from any point of monetary gain leads to an increase in utility for the investor)

Traditionally, outcomes are estimated by the probability of their implementation. One of the axioms of utility theory is: If the investment option A is preferable to the investor than option B in the risk-free situation, then the introduction of a risk (quantification of the probability of implementation, denoted, for example, by p) should not change preferences, those. investing in project A with probability of the expected positive outcome p should be preferable to investing in project B with the same probability p. Paradox, but in practice this axiom is not always fulfilled. When the probabilities are large (for example, more than 50%), then investors choose from the variants with the same expected monetary benefit that project, which is characterized by a higher probability, i.e. the emphasis is on probability analysis. If the probabilities are small, then the investor begins to neglect their estimates and focuses on possible winnings. A typical example demonstrating this pattern is given in Table. 6.6.

Table 6.6

Individuals and investors preferences in a situation of risk and certainty






Get the first place in the international competition



Get the first place in the Republican contest

Conclusion. Preference will be given to option B



Earn 900 thousand rubles for investment



Earn 600 thousand rubles for investment

Conclusion. Although the expected gain in the two options is 540 thousand rubles, but investors will prefer option B (with a higher probability)

A (refined)


Earn 900 thousand rubles for investment



Earn 600 thousand rubles for investment

Conclusion. Although the expected gain in the two variants is the same, however, investors will prefer option A (with less probability, but greater possible gain)

Generic output. When the win is possible, but unlikely, the preference is given to the variant with the greatest possible result

The axioms of the classical theory of expected utility of Newmann and Morgenstern are also violated when considering options with possible negative financial results - losses (losses). Typical examples can be found in insurance contracts. For example, preference is often given to insurance programs with limited coverage of losses with low insurance premiums. This indicates that the investor's choice becomes directly opposite to the situation with no losses (when only positive or zero outcomes are possible). Empirical studies prove that when investing with possible losses, the investor departs from the opponent's behavior of risk and becomes a "risk lover" (risk seeking).

The theory of prospects, or "prospect theory," was proposed in the late 1970s. two authoritative economists - professor of psychology at the University of Princeton (USA) D. Kaneman and now the late professor of economics at Stanford University (USA) A. Tversky.

The theory of prospects (prospect theory) is a theory of choice under conditions of uncertainty that challenges the provisions of the classical theory of expected utility through the formation of an alternative approach to normative in making investment decisions.

This alternative approach is called behavioral (behaviouristic behavior). The investor's decision-making under risk can be viewed as a choice between different "perspectives" in the terminology of the authors (in fact, investment decisions, projects). The key indicators that distinguish prospects (projects) are the benefits (outcomes) of investment (x) and their probability ( p ). Thus, the prospect with n possible outcomes can be described by the following expression:

Note that the sum of the probabilities is one.

If the investment option is such that only two outcomes are possible - x with probability p or 0 with probability (1 - p), then the perspective can be characterized as follows: (x, p; 0, (1 -p)). Accordingly, a risk-free asset having a probability of one, and the missing alternative can be simply denote by x.

The proof of the theory of prospects is based on a series of experiments. Numerous subsequent interviews with managers of non-financial companies and investors confirmed the correctness of the conclusions of D. Kaneman and A. Tversky. It was found that in situations of economic uncertainty, people's actions often contradict not only standard economic theory, but even probability theory. Thus, research shows that the flow of funds to the mutual investment funds growing in yield is much greater than in those that currently show lower results, although common sense dictates that one should buy when cheap. If the investor underestimates his own condition and positions him below the level of his ambitions and aspirations, then he can become a lover of risk. Feelings risk aversion largely depends on previous investment results. If they were positive, then the "aversion to losses" can temporarily decrease, and vice versa, after a series of failures it only becomes more acute.

The theory of prospects proves that two perspectives (two investment options) that have the same monetary outcomes and probabilities, depending on their context, may have different values ​​for the investor.

The context in perspective theory usually includes: 1) the sequence of events (stages) in achieving the outcome; 2) the starting point of the welfare of the individual, etc. The investor preference function is not concave in any situations. This is the so-called asymmetric reaction to the change in welfare. The theory of the prospects of D. Kahneman and A. Tversky shares two concepts: "profitability", or "utility" (utility), and value & quot ;, or fair value (value). The value function proposed in the theory of prospects is not linear, but has a fracture point, is concave in the loss region, and is convex to the domain of wins, i.e. an individual trait, called loss avoidance, is modeled.

The hypothesis of avoidance of losses suggests that individuals are inclined to avoid losses, known for certain (with high probability). Effect for certain ( certainty effect) leads to a revaluation of the profit and loss that will be received with a probability of 100%. This effect allows us to explain such unique investment solutions as the continuation of the unprofitable project for the sake of the mythical prospects of obtaining benefits in the distant future. For example, it is unlikely that investors will refuse to continue construction of a gas processing plant, which has already invested more than $ 1 million, even if there is no gas or the need to buy it at European prices. The motivation for continuing construction will be potentially possible benefits in the distant future, when electricity prices are liberalized and rapid industrial growth will generate demand for energy. Thus, the effect of sticking and the continuation of unprofitable projects can be explained by the theory of prospects.

The utility function in theory of perspectives is linear only in the middle of its existence and is significantly nonlinear at the edges ( S-shaped utility function), ie. does not correspond rice. 6.1: in the loss region it is concave, in the growth region - convex (Figure 6.2). It follows that, on average, with the same risks, investors are inclined to maintain the financial level achieved, rather than to increase it. In the equivalent conditions of a private investor, the possibility of small losses repels more than the possibility of a significant income.

Utility (value) function in perspective theory (S-shape)

Fig. 6.2. Utility (value) function in perspective theory (S-shaped)

The theory of prospects proves that investors will avoid risk in the growing ("bullish") market and become more tolerant to it on the falling ("bearish"). This is an obvious anomaly in terms of the classical theory of expected utility. However, the temptation of a person to search for an even greater risk after a series of losses with time only increases and dulls the sense of reality. Simply put, a person tend to strive for revenge after losing, not paying attention to failures, but in fact, he is less and less investing in winning trades.

thematic pictures

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