In my research related to ISM and behavioral finance, I have begun to shift from studying what behavioral finance is to what causes individuals to make irrational financial behavior. In my annotated bibliography and deeper research, I have analyzed some research of Robert Shiller, Terrance Odean and Brad Barber. I also found that some of the behaviors shown in these research pieces also show up in actual investor behaviors.
One behavior that I focused on in more detail was overconfidence. Terrance Odean analyzed actual brokerage accounts from thousands of accounts and was able to find support for overtrading by investors that are overconfident in their decision making or investing skills. This was interesting to me because simply being more confident does not equate to higher skill level. Overtrading may even hurt investment performance.
I also looked at the disposition effect. This is when investors tend to sell assets that have increased in value and hold onto assets that have decreased in value. This caused me to think more about emotional aspects such as loss aversion and regret influencing what seem to be purely financial behaviors. I also found interest in attention bias. There are thousands of assets to choose from and investors may be more likely to pay attention to assets that either have large price movements or receive a great deal of media coverage rather than paying equal attention to all assets.
I have found that the greatest aspect of my research has been relating some of these older behaviors in behavioral finance to the current state of finance. Some of the research I found was done prior to the rise of prediction markets, cryptocurrencies, social media, financial influencers, commission-free trading apps and the like that are as prevalent today as they are. This has also led to some new questions for me. Does access to more financial information make investors more informed or does it increase the effects of attention bias, herding and overconfidence? As I continue my research in ISM I would like to begin to shift from finding these biases to looking at how current financial systems may affect these biases or how I might attempt to test these biases.