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Behavioral Finance in Herd Behavior

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Behavioral Finance in Herd Behavior
Behavioral Finance and Herd behavior

National Taiwan University, department of Finance, Group 6, Oct 30, 2012.

BEHAVIORAL FINANCE AND HERD BEHAVIOR

INTRODUCTION
There are various types of irrational behaviors of investors, among which we are highly interested in why people tend to follow what others do rather than believe in his or her own judgment. The phenomenon is called herd behavior. Some investors claim, “We know there is herd mentality, so we need to be in the group.”

HYPOTHESIS : HERD BEHAVIOR1
Observing from the following examples , a tendency was unveiled that people would imitate the actions of a large group. It is sometimes a rather convenient way to deal with problems when faced with unimportant choices or when our brains are simply too lazy to activate System 2; however, in the following cases, people irrationally invested their hope and money, which obviously need to be dealt with rationality, into the markets they knew little about. We want to discuss about this irrational part of Herd Behavior. Below are three main reasons as hypothesis we think responsible for the irrationality: 1. The pressure of self-questioning. Human beings are social by nature and often make a choice in consideration of the acceptance of a group. If their analysis for markets is different from the public opinion , people would be confused and anxious. 2. The common rationale that the majority or the professional is unlikely to be wrong. Even if people are convinced that a particular analysis or action is incorrect or even irrational, they might still follow the herd and believe that the majority has some information that they don't. 3. People think they possess some private information not public shared. Nevertheless, they are still mimicking a little group's opinion without analysis from themselves.
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Behavioral Finance and Herd behavior

EXAMPLE 1: The International Bubble/Dot-Com Bubble
< Onset of Dot-com Boom >2 Began from 1993, the World Wide Web’s

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