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Nonrational Actors and Financial Market Behavior

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  • Richard Zeckhauser
  • Jayendu Patel
  • Darryll Hendricks

Abstract

The insights of descriptive decision theorists and psychologists, we believe, have much to contribute to our understanding of financial market macrophenomena. We propose an analytic agenda that distinguishes those individual idiosyncrasies that prove consequential at the macro-level from those that are neutralized by market processes such as poaching. We discuss five behavioral traits - barn-door closing, expert/reliance effects, status quo bias, framing, and herding - that we employ in explaining financial flows. Patterns in flows to mutual funds, to new equities, across national boundaries, as well as movements in debt-equity ratios are shown to be consistent with deviations from rationality.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3731.

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Date of creation: Jun 1991
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Publication status: published as Theory and Decision, vol 31, 1991, pp 257-287
Handle: RePEc:nbr:nberwo:3731

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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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References

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  7. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
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  25. Patel, Jayendu & Zeckhauser, Richard & Hendricks, Darryll, 1991. "The Rationality Struggle: Illustrations from Financial Markets," American Economic Review, American Economic Association, vol. 81(2), pages 232-36, May.
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Cited by:
  1. Goriaev, A.P. & Nijman, T.E. & Werker, B.J.M., 2002. "The Dynamics of the Impact of Past Performance on Mutual Fund Flows," Discussion Paper 2002-2, Tilburg University, Center for Economic Research.
  2. Alessie, Rob & Hochguertel, Stefan & van Soest, Arthur, 2006. "Non-take-up of tax-favored savings plans: Evidence from Dutch employees," Journal of Economic Psychology, Elsevier, vol. 27(4), pages 483-501, August.
  3. Alessie, R.J.M. & Hochgürtel, S. & Soest, A.H.O. van, 2001. "Non-take-up of Tax-favored Savings Plans: Are Household Portfolios Optimal?," Discussion Paper 2001-71, Tilburg University, Center for Economic Research.
  4. Harless, David W. & Peterson, Steven P., 1998. "Investor behavior and the persistence of poorly-performing mutual funds," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 257-276, November.
  5. repec:dgr:uvatin:2002122 is not listed on IDEAS
  6. Navone, Marco, 2012. "Reprint of Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2729-2741.
  7. Kelly, Morgan, 1995. "All their eggs in one basket: Portfolio diversification of US households," Journal of Economic Behavior & Organization, Elsevier, vol. 27(1), pages 87-96, June.
  8. Navone, Marco, 2012. "Investors’ distraction and strategic repricing decisions," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1291-1303.

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