Behavioral Finance: our view of the markets
Why do we repeatedly see irrational behaviour on the stock markets, expressed in the form of pronounced overvaluations or undervaluations? And why can this behaviour not be explained by traditional financial market theories based on the premise of people making purely rational decisions?
Investors are people. This is the starting point for Behavioral Finance, an area of research that looks at the actual behaviour of investors when making decisions. We start our own considerations here, but we go a step further. It is not the sum of the individual investors that determines the market, but rather the interaction between them.
Investors hold expectations about an uncertain future on the basis of existing patterns of perception and mental frames. Such patterns are adjusted in an evolutionary process, which is influenced by communication and which leads to the establishment of market-internal expectation structures thanks to the coordination processes in the market. These coordination processes result in trends and ultimately price distortions.
The analysis of these structures forms the basis for active portfolio management.
