Behavioural Finance Term Paper

Patience has become a rare virtue for investors nowadays. There is evidence that average holding times have fallen from five years, a decade ago, to less than a year in recent times, according to data extracted from the London Stock Exchange. Whether or not to invest in the capital market is a matter of personal attitude towards the corporate reality. If the answer is positive, the companies in which to invest and designing an optimal portfolio investment is a matter of calculations. Differentiating risk is often difficult and an investor should be acknowledged that there is no zero risk in trading with securities. Even corporate bonds, which are considered riskless in the capital market, are exposed to political risks that are outside the scope and laws of the capital market.

Behaviorists strongly believe that stock markets do not respond to corporate reality, but rather to investors’ moods (Louis Uchitelle, 2001). The group behavior they have keep the trends, sometimes artificially and often lead to losing positions; the overestimation of their investing skills repeatedly make them reluctant to give up on a falling stock and/or to admit a loss. Investors on the capital market seem to be more gamblers than reasonable traders. The logics that should follow a reasonable stock investment is similar to the story that once Ronald Reagan said: “Don't just do something, stand there” .

Investing in the stock market is said to be the best for the very long run. Every individual has their own financial goals, but as a whole everybody aims at higher return on investment which possibly be non-tax deductible in most countries. Long-term investment portfolios are perhaps the only means for realizing a two-digit return. Deposits rarely give more than 5 per cent and usually these are outweighed by the inflation. Long term stock investments are recommendable for most people, not only professional investors, as usually they do not require good and effective timing of the