Finance and psychology - a never-ending love story?!

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In recent decades, numerous financial crises have highlighted the inefficiencies of financial markets, including the stock crash of 1987, the Asian crisis of 1997, and the global financial crisis beginning in 2008. Despite varying causes, these crises reveal that traders often do not act rationally due to certain behavioral patterns. Even with extensive research, crises like the one in 2008 continue to arise from behaviors such as herding, necessitating a thorough analysis of these patterns. The author investigates how behavioral finance impacts the decision-making of traders and investors by identifying and examining seven key behavioral patterns through qualitative research, including an informal interview with experienced trader Thomas Vittner. To assess whether public investors exhibited herding behavior in response to analysts' stock recommendations during the financial crisis and its recovery, quantitative research was conducted through an experiment analyzing stock performances relative to these recommendations. Findings indicate that while the majority of analysts' recommendations aligned with market trends before the crisis, only about half did so during the crisis and recovery. This suggests that traders were more influenced by general market signals than by specific analyst recommendations, highlighting the extent of irrational trading behavior.