AREA- BEHAVIORAL FINANCE

GREED AND FEAR IN STOCK MARKET

By: Mathuriya Bhavesh, Ankit Sharma, Shivam Gupta

A stock market is the group of buyers and sellers (a loose network of economic transactions, not
a physical facility or divide entity) of stocks (also called shares), which represent ownership
claims on businesses; these may include securities listed on a public stock exchange as well as
those only traded privately. Examples of the latter include shares of private companies which are
sold to investors through equity crowd funding platforms. Stock exchanges list shares of
common equity as well as other security types, e.g. corporate bonds and convertible bonds.

Fear and greed are two powerful emotions that represent major obstacles to investment success.
Worried that they might be on the wrong side of a trend, some investors fall into the trap of
ignoring their long-term plans and disciplines and instead react to the noise of the market. The
noise is generated by the press and pundits, as they routinely grasp upon current events or ‘trends
du jour’ and convey a sense that investors need to act. Keeping perspective and adhering to a
disciplined approach is rarely the message – largely because it is boring. The reality is that
successful investing requires discipline and a clear set of objectives. Investors need to fight the
temptation to succumb to fear and greed if they want to win over the long run. stock markets are
driven by the fast and hectic trading of a large number of traders.

Although the behavior of stock prices is quite complex, certain universal features may be
identified . For instance, we observe a positive price trend in the long run which is occasionally
interrupted by crashes. Moreover, log price changes (i.e., returns) are uncorrelated while
temporal independence of absolute returns is strongly rejected. According to classical finance
theory, the statistical properties of price fluctuations are wholly caused by those of the
underlying fundamental process. For instance, volatility clustering arises since the intensity of
news varies over time. A more convincing explanation is provided by behavioral models that
take into account the trading decisions of heterogeneous agents.
Note that the trading behavior of agents is at least partially observable and thus may be
approximated. For example, some traders base their trading decisions on technical analysis rules
such as moving averages whereas others simply expect prices to return towards fundamental
values. Complex (chaotic) price motion may occur due to nonlinear interactions between the
agents.
If one adds dynamic noise to these setups, they may even be able to replicate some of the
aforementioned stylized facts . This paper aims at developing a deterministic behavioral stock
market model in which agents are influenced by their emotions. To be precise, the trading
activity of the agents is characterized by greed and fear. They optimistically believe in booming
markets, but panic if prices change too abruptly. In addition, the agents switch between two
activity levels. If market historical volatility is low, they are rather calm and vice versa. Although
the model is deterministic,
 It replicates several aspects of actual stock market fluctuations quite well. For instance, we
observe the absence of autocorrelation in raw returns but significant autocorrelation in absolute
returns.
We think that having a good understanding of what is going on in financial markets is quite
important. On the one hand, it may allow us to develop better investment strategies. Some
studies have recently made interesting progress in predicting the course of the stock market. On
the other hand, it may help regulators to control the markets. One may, for instance, use these
models as computer laboratories and test whether mechanisms such as transaction taxes are able
to reduce volatility. The paper is organized as follows. In Section 2, we present our model and in
Section 3, we discuss our results. The last section concludes the paper.

The Greed and Fear Factor is a simplified, yet comprehensive, guide to building, implementing
and maintaining a successful and personalized investment portfolio strategy. The book itself is
laid out in a user-friendly format with a spiral binding, "easy-on-the eyes" typesetting, and clear
tables, charts, and templates. Also included is an insightful guide to using the Internet and other
research sources. Finally, there is a comprehensive glossary of investment terms and acronyms.
Several often overlooked, but very important, considerations are explored, addressed and applied
to the "real-world" of investing. These include factors such as the emotional side of managing a
portfolio. The very title of the book is meant to emphasize this particular area. The Greed and
Fear Factor is a no-nonsense roadmap for individuals who are serious about maximizing their
investment returns. The author presents his methodology in detail, while giving a priority to the
reader's efficient use of time and resources.

Conclusion

While fear and greed have a romantic connotation that conjures images of Wall Street wisdom,
Gordon Gekko, and classic ads, there is a wide world of emotion outside of these broad
categories that you can use to persuade buyers. It certainly helps to know the power of fear and
greed, especially on an academic level, to pepper them into appropriate campaigns.

Especially if you’re in an industry where there is a level of natural internal fear in your
customers (security systems), learning how to evoke that in a respectful way on your site can
help propel conversions. However, there are many, many use cases that aren’t so benevolent. In
fact, because fear and greed are traditionally irrational emotions that override rational decision
making, they’re often used in confidence scams or get rich schemes. Still then, it’s important to
know their power, if only to avoid those attempts yourself.