The purpose of this thesis is to integrate behavioral finance with market microstructure and financial decision-making. Specifically, I focus on two issues concerning the integration of psycho-physiological mechanisms and the informational content of prices in financial markets: firstly, the role of emotions in financial decision making and how as an adaptive mechanism, they show to be more suitable for survival than pure rationality (in an economic sense); and secondly, the empirical and theoretical testing of how cognitive illusions and polysemy affect the informational content of prices.

The purpose of this thesis is to integrate behavioral finance with market microstructure and financial decision-making. Specifically, I focus on two issues concerning the integration of psycho-physiological mechanisms and the informational content of prices in financial markets: firstly, the role of emotions in financial decision making and how as an adaptive mechanism, they show to be more suitable for survival than pure rationality (in an economic sense); and secondly, the empirical and theoretical testing of how cognitive illusions and polysemy affect the informational content of prices.

It is easy to see that oil has a big part in our economy, by looking at the repeated news from the media and at the stock market, where they follow the oil price very closely. Behavioral finance is about investors making small or big mistakes in the stock market. Behavioral finance describes the importance of understanding your own faults, as well as others investor’s faults. Behavioral finance emphases the importance of not assuming that the financial market is a flawless environment, but to understand the psychology behind investment decisions. The essays purpose is to explain how the oil price effect investment decisions in the stock markets in Sweden, Norway and Denmark. I have chosen to use regression analysis to statistically see how the oil price is affecting the stock price for 11 stocks in the three different countries. The result shows that the oil price affects all the oil company’s stock prices and three other stock prices. The result also shows that the oil price is affecting the number of bought stocks for all the company’s in the essay. The conclusion is that the oil price has a positive effect on the trade in the stock market. If the oil price increases, then the number of bought stocks increases too. It is interesting to see that the numbers of bought stocks do not only increase for the oil companies, but also for the companies whose stock price is not affected by the oil price. To explain this behavior I have chosen to use the Behavioral finance theory.

Problem: Det har funnits många diskussioner kring traditionella finansiella teorier vad gäller den effektiva marknaden och investerares rationalitet. Den effektiva marknadshypotesen talar för att marknaden är effektiv och att aktiepriserna återspeglar all tillgänglig information, vilket resulterar i att det inte är möjligt att göra bra investeringar. Behavioral finance anser däremot att marknaden påverkas av beteenderelaterade aspekter och därför inte är effektiv. Vad är det egentligen som ligger till grund för aktieägares investeringsbeslut? Syfte: Syftet med denna uppsats är att, ur ett aktiemarknadsperspektiv, undersöka de psykologiska faktorerna bakom investeringsbeslut. Vidare ämnar studien undersöka vad för typ av information som påverkar aktieägare vid köp- och säljbeslut. Metod: I vår studie valde vi att använda oss av en metodtriangulering vilket innebär att både en kvantitativ och kvalitativ ansats har tillämpats i studien. Undersökningarna som genomförts har varit i form av en enkät samt intervjuer. Resultat: Slutsatsen som kunde dras utifrån undersökningarna var att aktieägare, till en viss del, påverkas av olika psykologiska faktorer inför sina investeringsbeslut.

In the past, most researchers found investors tend to be overconfident when making investment decisions. This paper, under the assumption that investors have the disposition of overconfidence, tries to examine whether investors will display different degrees of overconfidence when facing different situations. Results have been found investors will have more confidence in processing the information the market has revealed to make investments when facing companies with high firm-specific risks. Therefore, firm-specific risks will influence overconfident investors¡¦ investment decisions. Furthermore, this paper tries to further divide companies under consideration into three groups according to their market share to discuss overconfident investors¡¦ behavior. Finally, this paper uses some quantitative variables to proxy public and private information to test whether investors in Taiwan tend to overreact to private information than to public information. The results have proven that investors¡¦ overreaction to private information in Taiwan comply with other behaviors of investors in other countries.

行為財務學理論認為人的思維是有限的，在判斷與決策的過程中，會受到諸多心理因素所干擾，產生各種系統化的錯誤。行為財務基金即是利用人們有限心理下所產生的判斷偏見及行為弱點，在市場中創造出投資的機會，透過有紀律的操作方式，從非理性投資人行為所導致的市場異常現象中獲利。 本研究以J.P. Morgan在美國發行、主要投資於美國證券市場的五檔Intrepid行為財務基金為績效表現之實證研究對象，結果發現Intrepid系列基金自成立以來，績效走勢與大盤指數基金及同類型基金指數呈同向變動，其報酬與各類型基金指數之報酬相符，證實行為財務基金之操作策略是可行的。由於目前國內尚未出現以行為財務學理論為操作策略之共同基金，而國內證券市場又是以最容易發生心理偏誤的散戶投資人為主，因此，本研究認為行為財務基金在國內之發展是有其可行性的，發展行為財務基金對於國內投資人及投信業者而言，不僅是一種新的投資思維，也是另一種投資策略的選項。

Orientador: Mário Augusto Bertella / Banca: Gilberto Tadeu Lima / Banca: Elton Eustaquio Casagrande / Resumo: As Finanças Comportamentais, com base em estudos empíricos, procuram demonstrar que os investidores nem sempre se mantêm racionais ao tomarem decisões que envolvem riscos, conforme argumentava a Teoria Neoclássica de Finanças. Este trabalho tem como objetivo contextualizar o recente campo de estudo e replicar a investigação empírica do artigo seminal de Kahneman e Tversky (1979) que aborda a Teoria do Prospecto e que constitui a base de Finanças Comportamentais. Simultaneamente, serão comparados os resultados da pesquisa com os de Kahneman e Tversky (1979) com os obtidos nesse estudo. Os resultados encontrados nesta população específica mostram similaridade, e que mesmo com populações e períodos diferentes, os indivíduos tendem a se comportar de maneira, na maioria das vezes, contraria ao que argumentava a Teoria Neoclássica de Finanças / Abstract: Basing on empirical studies, Behavioral Finance seek to demonstrate that investors not always have a rational posture when it comes to making decisions that might involve some sort of risk, according to Neoclassical Finance Theory. This paper aims to contextualize recent studies and respond to the empirical investigation on Kahneman and Tversky's (1979) seminal article, which approaches The Prospect Theory and constitutes the basis for Behavioral Finance. The results of the investigation will simultaneously be compared to those of Kahneman and Tversky (1979). The results, which have been specifically found in this population, show that the results of the samples are similar, and even in different populations and different periods, individuals tend to behave, more often than not, just as opposed to the arguments of the Neoclassical Finance Theory / Mestre

Abstract The behavior of investors is often at odds with the assumptions of traditional finance theory. Research conducted over the past half-century or so abounds with examples in which the central axioms of traditional theory are systematically violated. One of the most well-established behavioral patterns in this context is the disproportionate tendency of investors to sell stocks that have appreciated in value since purchase (‘winners’) rather than stocks that have declined in value (‘losers’); this phenomenon is known as the disposition effect and most commonly attributed to Kahneman and Tversky’s (1979) prospect theory. The overall aim of this doctoral thesis is to investigate the robustness of this phenomenon, its underlying mechanisms, and its potential implications for individual investors. The four independent but related essays of this thesis were designed to answer the following research questions: (1) Does the disposition effect ‘survive’ bear markets, in which investors may not be able to realize gains even if they wish to do so? (2) Is there any supporting evidence for prospect theory-based explanation of the disposition effect in the form of other observed behavior consistent with the theory? (3) Is prospect theory the most feasible explanation for the disposition effect? (4) What are the implications of the disposition effect from the point of view of individual investors? Using comprehensive data covering virtually all trades executed in the Finnish stock market during 1995–2003, this thesis demonstrates the following: (1) As robust as the disposition effect appears to be in light of previous studies, the phenomenon is only partially detected in bear markets. (2) The relationship between prospect theoretic preferences and investor behavior is not easily generalizable to other behavioral patterns besides the disposition effect. (3) In fact, even the relationship between prospect theory and the disposition effect is not as strong as is generally believed. Our results instead suggest an explanation based on escalation of commitment, according to which the disposition effect is caused above all by self-justificatory concerns. (4) Finally, although the disposition effect is generally inconsistent with economic rationality, it does not appear to be detrimental to investment performance.

My dissertation consists of three essays. The central theme of these essays is the psychological factors and biases that affect the portfolio allocation decision. The first essay entitled, “Are women more risk-averse than men?” examines the gender difference in risk aversion as revealed by actual investment choices. Using a sample that controls for biases in the level of education and finance knowledge, there is evidence that when individuals have the same level of education, irrespective of their knowledge of finance, women are no more risk-averse than their male counterparts. However, the gender-risk aversion relation is also a function of age, income, wealth, marital status, race/ethnicity and the number of children in the household. The second essay entitled, “Can diversification be learned?” investigates if investors who have superior investment knowledge are more likely to actively seek diversification benefits and are less prone to allocation biases. Results of cross-sectional analyses suggest that knowledge of finance increases the likelihood that an investor will efficiently allocate his direct investments across the major asset classes; invest in foreign assets; and hold a diversified equity portfolio. However, there is no evidence that investors who are more financially sophisticated make superior allocation decisions in their retirement savings. The final essay entitled, “The demographics of non-participation”, examines the factors that affect the decision not to hold stocks. The results of probit regression models indicate that when individuals are highly educated, the decision to not participate in the stock market is less related to demographic factors. In particular, when individuals have attained at least a college degree and have advanced knowledge of finance, they are significantly more likely to invest in equities either directly or indirectly through mutual funds or their retirement savings. There is also evidence that the decision not to hold stocks is motivated by short-term market expectations and the most recent investment experience. The findings of these essays should increase the body of research that seeks to reconcile what investors actually do (positive theory) with what traditional theories of finance predict that investors should do (normative theory).

Abstract Background: ​The disposition effect is a well-documented effect in behavioral finance, first brought to light in 1985 by Shefrin and Statman. The effect is caused by investors valuating unrealized gains and losses differently which can be connected to concepts like the prospect theory, Tverksy and Kahneman (1979), and loss aversion Kahneman et al. (1991). To examine the existence of the disposition effect in Sweden, the authors of this thesis performed a study where the participants played a stock simulation game. Purpose: ​The purpose of this study is to examine whether the investor experience plays a crucial part in the mitigation of the disposition effect. Method: ​The study of this thesis is conducted by collecting primary data using a quantitative research strategy by utilizing a virtual trading game and a post-experiment survey. Following this, the data derived from this experiment is used to calculate the disposition effect by calculating the Proportion of Gains Realized and Proportion of Losses Realized of the participants. To fulfill the purpose, t-tests in the form of one-sample t-tests and independent samples t-test were used to determine if the results of our study were statistically significant. Furthermore, Spearman correlations were also implemented to test for correlations between subgroups and the disposition effect. Conclusion: ​Statistically significant results confirm that there was a disposition effect among the subject group at a 1% confidence level. While there was a difference in disposition effect between the experienced and inexperienced groups, the difference was not statistically significant which could be explained by a small sample size and a subjective measure of experience.