New Insights into Behavioral Finance

This thesis applies insights from psychology and other behavioral sciences to overcome the shortcomings of the traditional finance approach (which assumes that agents and markets are rational) and improves our understanding of financial markets and its participants. More specific, this thesis provides important new insights into the preferences of investors, their investment decisions, and the behavior of financial markets. The results show that people dislike downside risk and employ decision-making patterns that may result in risk-taking behavior of which they are not aware, or in which they normally would not engage, and that can result in non-optimal behavior. More specific, people behave 'non-optimal' by changing their behavior in response to previous outcomes and by letting their preferences depend heavily on the other outcomes that are or were available, even when hundred thousands of euros are at stake. Moreover, people tend to use simplifying heuri! stics to construct their investment portfolios by focusing on the outcomes of the individual assets available instead of their total investment portfolio. Furthermore, this thesis shows that incorporating behavioral-based preference patterns has substantial influence on investorâ?Ts optimal behavior in financial markets. More specific, the value premium (the empirical finding that stocks with an high measure of book value relative to market value earn higher returns than stocks with a low measure) is nearly absent for investors with an substantial fixed income exposure, an annual evaluation horizon and an aversion to losses.

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