Catherine May C.

Pascua

1 FM 2

1. What contribution can Behavioral Finance make to the explanation of Stock

Market's bubbles and crashes?
The herd instinct or behavior where financial specialists follow others speculator to what's
happening with they, they don't have their own investigation. For instance, when a gathering of
financial specialists purchases a specific stock and the other idea it is a wise venture so they
additionally purchase that specific stock. Another example is, now that there are a pandemic
many people buy things like toilet paper and alcohol so the investors think it will bring them
profit so they buy stocks in company that produce that and many other investors follow them si it
cause a bubble in market. There also that statement from and Oliver who have proposed the
Liquidity Theory of Asset Prices, they said that a major driver of stock markets is the amount of
liquidity available for investment. In other words, if individuals have more cash to contribute
they will contribute more and along these lines push up share costs.

2 Explain behavior in Financial Markets?

These are Behavioral Finance Concepts that can affect in Financial market.

Mental accounting it refers to the propensity for people to allocate money for specific purposes.

Herd behavior states that people tend to mimic the financial behaviors of the majority of the
herd.

Emotional gap refers to decision making based on extreme emotions

Anchoring: Anchoring refers to attaching a spending level to a certain reference.

Self-attribution: Self-attribution refers to a tendency to make choices based on a confidence in

self-based knowledge.

Catherine May C. Pascua

1 FM 2
There are also biases that has negative effects in financial market. for example, Confirmation
Bias

Confirmation bias is when investors have a bias toward accepting information that confirms their
already-held belief in an investment. If information surfaces, investors accept it readily to
confirm that they're correct about their investment decision—even if the information is flawed.

Behavioral finance seeks an understanding of the impact of personal biases on investors adnd
hope to corrects it before a negative things happens

3. What are the flaws of Finance?

According to Visualcapitalis.com there are 7 Flaws in financial system.

1. Billions of people globally remain unbanked

2. Global financial literacy remains low
3. High intermediary costs and slow transactions
4. Low trust in financial institutions and governments
5. Rising global inequality
6. Currency manipulation and censorship
7. The build-up of systemic risk

In behavioral finance there are many flaws for examples are the biases that can bring negative
effects. It can also influence our own behavior. The likelihood of financial bias affecting our
decisions increases during strong rallies and when volatility increases. Every type of bias can
negatively affect decision making. Therefore, it is important to be aware of all these traits in
human behavior. Limited predictive power. Behavioral finance tells us more about what people
won’t do than what they will do.