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Market Psychology & Behavioural Finance

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Market Psychology & Behavioural Finance

Panic Selling

Selling driven by fear during a sharp decline, without reference to value.

Test: the sale is triggered by the size or speed of the price fall rather than by new information about the asset qualitative Market Psychology & Behavioural Finance

Present Bias

The tendency to overvalue immediate rewards relative to larger rewards available later.

Test: a smaller immediate reward is preferred to a larger delayed one, at a discount rate far above the market rate qualitative Market Psychology & Behavioural Finance

Probability Neglect

Focusing on the magnitude of a possible outcome while disregarding how likely it is.

Test: the decision responds to the size of a payoff or loss but is insensitive to changes in its probability qualitative Market Psychology & Behavioural Finance

Prospect Theory

A model of decision-making under risk in which outcomes are valued as gains and losses from a reference point, with losses weighted more…

Value function: concave for gains, convex for losses, and steeper for losses than for gains by a factor of roughly two qualitative