1. Introduction

1.1 Research background

1.2 Research significance

1.3 Research method

1.4 research contents

1.5 creations and limitations

2. Literature review

2.1 Irrational behavior in Behavioural Finance

DeBondt and Thaler (1985) published "is the stock market overreact?", which marked the beginning of behavioral finance. Kahneman And Tversky (1973) put forward the concept of "framed", think framed way of thinking affects decision making. They point out that different from the rational hypothesis in traditional finance theory, real people are bounded rationality, facing the risks, the behavior main body do not only pay attention to the final wealth, but the winning or losing in the process. In the process of investment decision, investors tend to be instinct rather than by the optimal decision model in the traditional finance theory, with the Bayes learning process to correct the judgment and to predict the future (13). Hirshleifer (1975) and Feiger (1976) scholars put forward the differences of subjective behavior can lead to speculative behavior, market main body clearly know some asset prices deviate from actual value, but they make sure people willing to buy at a higher price in the future, so they buy these assets continuely. Due to the differences of subjective behavior of speculation often cause a systemic deviation of asset prices (16). Harrison and Kreps (1978) these two scholars think compared with investors holding an asset in a long time, if the investors have the right to dispose of an asset at any time, so investors are willing to pay with higher prices, the process shows the characteristics of speculation. In this economy overall look, if there is no corresponding increase in the flow of the asset value, and investors have paid a high price, this suggests that there is speculation in economies (10). In 1979, professor Daniel Kahneman in Pulis university and professor Amps Tversky at Stanford university wrote the paper “at the expectancy theory: risk decision analysis” which is published in Econometrics. In 1982, Kahneman, Slovic and Tversky jointly wrote the book “the uncertainty of judgment: a heuristic bias”. The publication of this book marks the rise of behavioral finance, especially the expectancy theory is put forward, to more close to the reality of assumptions, badly shaken expected utility theory of traditional finance theory, lay A solid foundation for behavioral finance, but also make the investors' irrational behavior research has a theoretical basis and experimental basis (2).

Kindleberger (1989) put forward such nvestors’ groups, investors can be summarized as two kinds of groups, players and outsiders, players will make price up through various measures, at the time of high price to sell to outsiders, outsiders buy in high prices but sell in lower prices, for each unstable speculator, there is a counterpart with a stable speculator. He thought that speculators are often encouraged by a kind of expectations, which means the boom will continue in a quite long period, to form a false prosperity of speculation, he also made more detailed definition for speculation that an asset or some asset prices are rising to a continuous process, the initial prices will make people's expectations of further higher prices, so as to attract new buyers, these people are not interested in assets usage and profitability, but seek profits through price differential (14). In 1990, DeLong, A. Shleifr, Summers and Waldman these four American scholars in a series of papers published gradually formed the basic framework of theory of noise trading --DSSW model. In the DSSW model, because of the noise traders will make some cognitive or emotional bias, thus appear excessive response or lack of response to the change of market based information, when the market is in the rise, they become too optimistic, but become too pessimistic when the market is falling, leading to excessive price rises and fall, deviated from the basic value (3).

Froot, Scharfstein and Stein (1992) pointed out that in the case of common short-term trading, trading between people is likely to focus on some certain information, even with the base value of unrelated information to make decisions, which leads to information resource configuration is not reasonable to some extent and price deviates from its value obviously, thus reduce market effectiveness, when many traders gathered this information this will lead to herd behavior, and at the same time, they consider in noise trading and short-term investment markets, traders have their own collection of information, when using one information traders become more and more, it is more likely to benefit, this information may be associated with fundamental value, may also be the noise which is irrelevant with the base price Value (15). Shefrin And Statman BAPM (1994) put forward BAPM is corresponding to the CAPM in the traditional finance, this emphasizes that the people rationally seek profits at the same time pay more highlights of the characteristics of the value feeling. At the same time, investors can be divided into two types: information traders and noise traders. They think information traders do not make cognitive error, and there is good statistical variance between different individuals, only need to pay attention to combination of mean and variance. Noise traders in the case of information asymmetry in the information are disadvantaged, often make cognitive mistakes, there is remarkable heteroscedasticity between different individuals, no strict variance preferences, for instability of risks which have variability and earnings forecasts. The two types of traders are interacted, when rational traders are of the majority the market performance is effective, when noise traders are of the majority, market performance is inefficient (7). Shefrin And Statman (2000) proposed the behavioral portfolio theory (BPT), the theory has changed the modern portfolio theory (MPl) which emphasizes the investors' optimal combination in variance on the efficient frontier, And thus put forward that the combination of behavioral finance is the pyramid of layered structure model, each layer is corresponding to the specific investment objectives and risk. in 2000 Robert j. Shiller Published the famous "irrational exuberance", which reveals the irrationality influence on people's decision-making behavior (52). Wong kar - Jiu (2001) with a dynamic model studies Thai real estate speculation phenomenon, reveals that in the condition of the overheating economy, a lot of international hot money enter, overly optimistic expectations interact between the real estate developers and residents, and produce the flock of sheep effect, which has played an important role in the process of the real estate market expansion (6). Nan Kuang and Chen (2001) use the theory of rational bubble random to make empirical testing for 1973-1992 housing and stock prices in Taiwan, found that before 1987, GNP and house prices growth rate were almost consistent, after that the relationship between is seperated, which is contrary to the traditional financial phenomenon indicates that irrational behavior has a huge impact on the market [5].

2.2 theoritical foundation of traditional Behavioural Finance-- The efficient market hypothesis

Traditional financial theory originated in the 1950s of the 20th century, in 1952 Markowitz published a paper “portfolio selection”, which proposed the mean variance model and portfolio theory, this marks the beginning of the traditional financial theory. Sharpe, Lintner and Mossin capital asset pricing model, Ross arbitrage pricing theory, enrich the development of the traditional financial theory. In 1970 Fama proposed the theory of efficient market hypothesis for the traditional financial theory to lay a solid foundation. After that, the Black - Scholes - Merton proposed option pricing theory. At this point the Conventional financial theory established a relatively complete theoretical framework, traditional financial theory has been widely used in practice, which has established its subject status in the field of finance. The efficient market hypothesis as the foundation of the traditional finance theory, its establishment fundamentally determines the correctness of a series of financial theory.

Fama as the famous for efficient market hypothesis theory, firstly comprehensively systematically introduces the basic contents of the efficient market hypothesis. He thinks investors always as possible use the information obtained to get higher returns, prices can make correct response rapidly for new market information, prices can fully reflect all information, the price of the securities in the market competition in the transition from one equilibrium to another equilibrium level, through new information related to the price change is not only independent of each other, and at the same time also is random. So the prices on the stock market are unbiased estimates of value for investors, is a response to all information completely and accurately, and can accurately make corresponding change with the emergence of new information. So that investors can't get excess returns through forecast for price.

2.2.1 Premise condition of The efficient market hypothesis

The conclusion of the efficient market hypothesis is established on the basis of the three basic assumptions. The first is to think investors are fully rational, can make unbiased estimation to asset prices for the future. The Second is to think that even if investors are not fully rational, but because of the trading behavior between them are random, so the impact on prices will offset each other. The third is to think even though investors are not completely rational and trading behavior will not be able to offset each other, but because of the existence of rational arbitrageurs can hedge the behavior of the irrational traders, making the market effectively.

In the first case, investors make the rational estimation to foundation value of the market, but swiftly react to new information obtained in the process of market trading and related to the basic value. So as to make the market price according to the information to make corresponding adjustment. Samuelson and Mandelbrot studies have found that if investors remain risk neutral in the competitive market and are not able to predict returns, then prices and values will obey the law of random walk, then the efficient market hypothesis is the equilibrium for a rational investor to participate in the market.

In the second case, if investors are not completely rational, so as long as investors in the market make random trading and the trading volume is larger and are independent of each other, then the prices’ irrational effects can mutual offset in the process of trading, prices are still surrounding the law of value, the irrational traders strategies independence between them is a key factor to this conclusion.

In the third case, between the irrational traders even strategy independence conditions do not conform, arbitrage can still make the market fully effective. Rational arbitrageurs as automatic stabilizers in the market, when prices are affected by the irrational investors some behaviors and deviates from the basic value, for example when the price is a little bit higher than the basic value, arbitrageurs just by selling assets, at the same time buy similar assets which prices are not overvalued to avoid risk can gain risk-free returns. in this process Price will gradually near its base value, also the existence of arbitrageurs has an important significance which is that irrational investor gained arbitrageurs is always lower than the market and rational investors, and they are usually always losses, the final results due to can't loss indefinitely, so they have to exit the market at a certain point. So the market in the competition and under the condition of arbitrage is efficient.

2.2.2 Empirical foundation of The efficient market hypothesis

The efficient market hypothesis of empirical can be summarized as two kinds: one kind is when basic asset value is impactted because of the influence of new information, the price of the asset can quickly and accurately response on time. The other kind is that asset price changes are subject to changes in its basic value of law, if the asset basic value does not impacted by relevant information, asset prices would not be affected by the change of supply and demand or other factors.

According to the reflecting degree of price on information, the effective market can be divided into several types. One is weak valid market, which refers to in the market prices already reflect all historical information, investors can not use the past history of price information to obtain excess profit. The second is the semi-strong efficient market: the market price not only reflects the historical information in the past, at the same time also reflects the current public information, investors can't through the analysis of the historical information and current public information obtain excess profit. The third is Strong efficient market: means the market price not only reflects the above two kinds of information, but also reflects all the insider information, so any investor could not through the grasp of the three kinds of information obtain excess profit.

Early the efficient market hypothesis is supported by empirical evidence, in testing weak efficient market, the Fama tested the stock price generally conforms to the rule of variation of random walk, and concludes that technical analysis of trading strategy will not be able to earn extra profits. At the same time through the events analysis verify the validity of the semi-strong efficient market.

2.3 Limitations of traditional Behavioural Finance

2.3.1 the assumption of reasonable people is unreasonable.

The meaning of rational man hypothesis includes two aspects, one is the market subjects participation in decision making are based target of maximizing the expected utility. The second is the main body of participation in decision making can through the information they get make an unbiased estimate of the market. The assumption of rationality has been questioned. In the first place of the real financial market, the market main body behavior does not strictly comply with the rational man hypothesis, market main body behavior is restricted by the objective environment, which limits its rational maximum decisions. At the same time digestion and collection of information are restricted by time and energy, the market main body in the process of decision-making tend to pursue the most satisfactory solution, rather than the optimal solution. Two is the market main bodies’ risk measurement is not strictly in accordance with the rational hypothesis, people in risk judgment are not to win the absolute number of wealth, often pay more attention to personal gains or losses under the reference standard, people will more avoid losses, and get cash profit. The last is that when people predict outcomes of uncertainty about the future, also not strictly according to the Bayesian rule to act. Sometimes people tend to use short-term data or empirical data to predict the future, exaggerating the role of chance or important events.

2.3.2 it is unreasonable for the irrational traders’ behavior offset each other

The efficient market hypothesis thinks the deals between irrational market main body behavior are random, the error trading strategy are offset. Psychological research results denied the rationality of the claim. Researches find out that people do not deviate from the rational accidentally, but in the same way regularly deviate, the market main body of investment strategy has obvious consistency, and cannot cancel each other. Even though they have good knowledge of professional managers in order to avoid risk and reputation, also tend to conform to follow other strategies of investors, the herd mentality is very clear.

2.3.3 arbitrage is bandlimited 

The efficient market hypothesis thinks rational arbitrageurs can eliminate irrational behavior of individuals and make markets characterized by efficient, so that the price is in conformity with the basic value. And whether rational investors should play a role of arbitrage or not requires a few prerequisites. First of all, irrational investors will not be able to dominate the market, othersie the rational investors won't be able to make the price match to the value. Secondly, in the process of market transactions it allows for a low cost short selling, and can only rational investors to sell, irrational investors can't take this, otherwise it will lead to further price deviation. Finally the real value of the assets must be able to be accepted by the market after a period of time, so that the irrational investors accept their mistakes and consciously adjust their behaviors, avoiding deviate to further continue. The reality is difficult to meet these conditions. And in the real market background, the arbitrage activity is full of risks.

2.3.4 the efficient market hypothesis test has some problems

For now, the market validation of effectiveness mainly demonstrates through relevant expected return model, such as arbitrage pricing model and capital asset pricing model, etc. When real return model is not the same with the expected returns, the market is considered invalid. people usually deny the validity of the markets through the excess yields between the low prices in financial markets and higher B/M shares, but actually we can't determine whether the tone model of excess return is very accurate, this would require the market efficiency and the expected return model are able to prove at the same time, thus falls into a paradox: the expected return model is based on the premise of the efficient market hypothesis, and when we test the effectiveness of the market the premise assumptions is that the expected return model is correct. So can't test the effectiveness of the market through the market efficiency under the premise of the expected return model.

2.3.5 it cannot explain the financial market anomalies

The efficient market hypothesis has the basic premise which refers to that people's behaviour is rational, people can through the use and control of information achieve the expected utility maximization. Before 1970, the efficient market hypothesis is supported by a large number of empirical studies, as people do further researches, many financial market anomalies can not make reasonable explanations on the basis of the efficient market hypothesis of traditional finance, such as losers- winners effect, Friedman-Savage confusion and so on. These make the traditional finance in trouble. Behavioral financial theory arises at the historic moment, behavioral finance theory thinks rational concept in traditional finance is too idealistic, rational person should be these with rational desire without completely rational ability, thinks the market choice also is not absolute, in the process of market transactions irrational traders will be able to make long-term survival.

2.4 Main theories and models of Behavioural Finance

2.4.1 Psychology foundation

2.4.1.1Psychology Of Emotion

(1) over-confidence

Psychologists through empirical observation found that for a long time, people usually too believe their own ability to judge, will overestimate their chance of success, tend to attribute success to their abilities, usually underestimate other external factors such as opportunity and luck playing a role in them, the cognitive deviation is defined as excessive confidence, but because of the overconfidence, investors tend to focus on those information that can only make them enhance self-confidence, and ignore the information which damage their self-confidence, investors will usually appear excessive trading by overconfidence, this can be seen from a high turnover rate in China's stock market. Second is the game process of bankers and small and medium-sized investors, which also shows investors overconfidence, for judgment overconfidence of investors lead to the frequent trade so as to make the market trading active.

(2) fuzzy aversion

Investors tend to dislike of subjective or vague uncertainty degree more than dislike of objective uncertainty, Heath and Tversky found people degree of dislike the fuzzy is often negative correlation with subjective probability estimation of uncertainty with them. Fox and Tversky also pointed out that people who used to have investment decision-making failure or have the ability participants around will be more fuzzy. This includes two levels of meanings, first of all, investors through their own ability make decisions directly expressing disgust but is more likely to make gamble type choice, when people show less confident about their abilities, fuzzy aversion performance becomes more obvious. People more tend to prefer choosing uncertainty on the choice of objective rather than the subjective uncertainty.

(3) Loss aversion and regret aversion

Psychology studies have shown that investors will feel pain on their own decision-making behavior to make mistakes. Degree of the pain may be bigger than loss caused due to errors, this is the so-called regret aversion. People usually fear of causing regret, investors behavior are often characterized by blindly conformity, to buy the shares everyone agrees, such as stock prices fall, given that everyone will suffer the same loss, this will relieve the pain of the investors. Loss aversion, however, refers to the investors in the face of the same number of losses and gains, and often feel more unbearable on loss caused by the damage. So in the process of market trading, losses investors usually are not willing to sell stock to face the loss. Regret aversion And loss aversion well explain the disposition effect, in which investors hold losses shares for a long time, but sell the profit shares earlier. Disposition effect lead to investors decrease transactions in a bear market and in the bull market do trades frequently.

(4) The feedback mechanism

Investors' psychological process is embodied in the process of investment, because of the emotional, cognitive and other deviation, resulting in different assets appear on pricing deviation, however the asset pricing deviation will affect cognition and judgment of investors and this process is "feedback mechanisms". That is thought due to various psychological deviations of the investors they overestimate or underestimate some prices of the stock, when the mood are widespread, will cause the stock price increase or decrease, while the other investors will follow to make the same decision to further make price rise or fall, form a vicious circle.

(5) Insufficient information overreaction and reaction

The price of the stock depends largely on expectations for the future of the stock trader, but that expectation depends on the information related to the stock and handling of such information. If traders overvalued on the latest information and could lead to expect too much, and to make decisions by high expectations can lead to excessive reaction. For example, Investors become too optimistic on the rise in the market, and when the market tends to decline they becomes too pessimistic, which can lead to excessive price rise or fall. Reaction insufficiency refers to there is a deviation for the market main body's response to information, lead to undervalued traders on the latest information, indifferent to some information, even there is no reaction, in This case, will cause investors to lose the best timing, bring about losses for investors.

(6) Conservatism

It refers to people's minds have a certain inertia some times, it is very difficult to change an individual's original ideas, new information on the original concept’s correction is often inadequate, conservative characteristic performance for people tend to focus too prior probability, and neglect the conditional probability. Conservatism has two characteristics: first, for people to estimate and judgment on uncertainty things usually set an initial value, and then through the information feedback modify the initial value, the empirical results show that can't be completely fixed, the idea of people are often broke down on the initial value. Second is market main body not only with new information to modify the initial value faith, instead of taking the new information as the confirmation its original information, to strengthen the original belief.

2.4.1.2 incognitive psychology

(1) representativeness heuristic

Representative heuristic says that people infer results directly in the case of uncertainty, by some aspect of the problems’ characteristics, and not think about the characteristics of real probability and other reasons related to these characteristics, in many cases, this way of thinking is a very effective method, it can help people quickly seize the essence and thus deduce the problem. But sometimes also can bring about serious deviation. People through representative heuristics make their own decision behaviors, which often exist two serious deviations: one is too much emphasis on a feature of events rather than the true probability of their occurrence, which result in the deviation of belief. Two is to ignore the influence of sample size on reasoning.

(2) The availability heuristic

Availability heuristic refers to people in making decisions, usually rely on the first thought of experience and information, and think that these events which are easy to recall appears more prossibility, as the basis of their judgment in deciding, under a lot of conditions, the people to determine the possibility of a certain event occurs, the judgment is based on the existing information including memory or to the difficulty of the amount of memory, rather than to find other relevant information. Usually people use more of their knowledge or access to information, ignoring the information for correct evaluation and decision making may have important influence, in this way, judge deviation may appear. For example, individual investors in investment combination will tend to choose their own or i the stock in this region, thus make portfolio risk-reducing function to weaken. when investors choose stocks Will first consider often mentioned in the media and others, this is because of the accessibility and availability heuristic search efficiency caused by the deviation. Institutional investors on China's stock market joint media constantly create all kinds of noise sources, beneficial to crops, in particular the judge a person's misleading comments and recommendation, lead to small and medium-sized investors in making decisions unconsciously fall in to the availability heuristic, which can lead to the stock market false prosperity by popular hot spots.

(3) The anchor adjust

Anchoring and adjustment is an initial reference point in the process of solving complex problem when people tend to choose, and then gradually through access to information to modify the initial value. In most cases the result people get is the estimate on the first value after adjusting. In the case of undetermined condition, people tend to take the reference point as anchor to reduce uncertainty. Then constantly adjust to the final conclusion. However, this adjustment is often biased, with reference to different initial points will lead to different bias. Slovic and Lichtenstein also point out that the initial value whether in question has a hint or a rough estimate, then the adjustment is often incomplete, different initial values will lead to different results. Kahneman and Tversky in1973 point out people use those significant and memorable judgment evidence to make decisions, thus get distorted.

(4) The frame dependence

In the process of cognition and judgment of things people have dependent psychology to the background, essence in people's minds will be affected by some form of surface. Is framed framed depend on the judgment and the cognitive deviation deviation, refers to people in the process of judgment and decision of decision problems will produce in the form of dependence. Although nature is the same but due to the expression problem in different ways leading to different people to make decisions. Changes such as investors in the value of judgment or other information, will be to review and some of the information publisher for problem is influenced by different ways of expression, so as to lead investors to the judgment of the decision is largely limited by the media and publishers.

(5) The psychological account

Mental account is refers to the investors are usually based on the source of the funds, the place of capital and capital USES factors such as the capital. In traditional economic theory, money can be replaced, that is, all the funds are completely equivalent. In the reality, however, money is often can not completely replace, people are more likely to invest their assigned to separate mental accounts, and according to the different account make different decisions. People in the decision-making process through to the three account to evaluate the choice of gain and loss, A, A minimum account, and the differences between the options related, has nothing to do with the common features between each scheme; B, local accounts, describes the relationship between the reference level with the alternative results, background influence decision-making reference level; C, comprehensive account to evaluate alternatives through the broader category of gain and loss. The risk of treatment of different mental accounts, people's attitudes are different. For investors in the value of mental accounts money usually has strong characteristics of risk aversion, but have to in the appreciation of the psychological account of money Has the characteristic of risk neutral, even in pursuit of high returns regardless of the risk. As Frideman and Savage study found that people will buy insurance and lottery ticket at the same time.

(6) Magical thinking

BF. Skinner by pigeons did a psychological experiment, to in a state of extreme hunger in the experiment of the pigeons every 15 seconds at a relatively small amount of food for feeding, this will certainly not determined by the pigeon's performance in the face of the food. But the pigeons is wrong as some of their performance to cause human feeding on them. So, every pigeon will repeat past performance and to attract people's attention once again expected to get food. Shiller believes in reality many economic behavior can also use the pigeons the psychology to explain. Its sales and profit growth, for example, a company before to make an investment or business decisions, and the profits of the company is just growing during this period, people will think that these results are the result of this decision, but also will lead to further strengthen the notion, due to the correlation between enterprise strong and to react to each other on each other's behavior, so it is possible that this way of thinking a overall impact on the economy as a whole.

2.4.2 Theory foundation

Herd behaviour refers to the people often affected by most people, and follow the public's thoughts or behavior, also known as "herd effect". People will follow to be agreed upon by the masses, oneself will not thinking about the meaning of events. Herd behavior is the foundation of the resort to the fallacy. Often use "flock effect" in economics to describe economic individual psychological herd follow suit. Sheep is a very messy organization, at ordinary times together also is blindly left rushed right into, but once in motion, there is a sheep other sheep will rush without hesitation, regardless there may be a Wolf or not far away there is better in front of the grass. Therefore, "herding effect" is metaphor has a herd mentality, herd mentality is very easily lead to blindly follow, and follow blindly often find ourselves in a scam or fail.

2.4.3 investors’ behavior model

3. Abnormal phenomenon in Real estate market

3.1 The uneffectiveness of the real estate market

3.1.1 P/E ratio is too high in real estate market

3.1.2 housing price to income ratio is too high in the real estate market

3.1.3 commercial housing vacancy rate is high

3.2 behavior characteristics of the investors in the real estate market

3.2.1 the real estate market turnover rate is too high, there are hidden risks

3.2.2 in the real estate market herding effect is significant

3.2.3 in real estate market people chase price increasing

3.3 expectations is the main cause of price volatility

3.4 Empirical study—take Shanghai real estate market as example

4. behavior finance explaination on real estate market

4.1 systemic deviation of investor behavior

4.1.1 overconfidence

4.1.2 overreaction and inadequate response

4.2 from the theory of noise trading to analyze real estate market anomalies

4.3 from the herd effect to discuss the real estate market anomalies

4.3.1 the concept of herd behavior

4.3.2 The causes of herd effect in real estate market

4.3.3 game analysis of real estate market of herd behaviour

4.3.4 effect of herd effect on the real estate market process

4.4 the positive feedback trading behavior further lead to the real estate market fluctuations

4.5 summary

5. Conclusion and Financial Advice

5.1 Conclusion

5.2 Financial advice

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标签： Behavioural Finance   Financial Advice