Behavioral Finance in Emerging Markets: A Cross-Disciplinary Perspective

Abstract

The key perspective of this particular review paper is to analyze the role of behavioral finance in stock market by systematically reviewing existing literature. This review encompasses both past and present research within the theme of behavioral finance, aiming to offer a structured resource for future researchers in the field. The endeavor seeks to enhance the understanding of behavioral finance research. Additionally, this study aims to categorize prior literature, providing a comprehensive bibliography on behavioral finance. Furthermore, the study examines the present level of research in this field and suggests possible directions for further investigation. The research delves deeper into the consequences of behavioral biases on the market, wherein investors exhibit tendencies to either overreact or underreact to incoming news. This behavior leads to increased volatility and distinct turnover patterns. The study specifically focuses on heuristic-driven biases identified in both Behavioral Finance Micro and Behavioral Finance Macro. The biases, including Overconfidence, Mental Accounting, Framing, Representativeness, Conservatism, Disposition Effect, Anchoring, and Self-Control, are scrutinized to gain a comprehensive understanding of their impact. The examination of how market overreaction contributes to excess volatility reveals a substantial impact, implying that evaluating market behavior can assist in forecasting excess volatility. Moreover, the influence of irrational behaviors and heuristics on trading volume or turnover contributes to excess volatility, primarily due to the inherent momentum effect embedded in trading patterns. This emphasizes the intricate interplay among behavioral biases, market responses, and the resulting patterns of volatility.