The Role of Cognitive Biases in the Fluctuation of Traditional and Modern Financial Markets

Authors

  • Naavya Sheth Jamnabai Narsee International School
  • Radu Gabriel Cristea University of Cambridge

DOI:

https://doi.org/10.47611/jsrhs.v11i3.3133

Keywords:

Cryptocurrency, Herd Behaviour, Cognitive Biases, Financial Markets, Fluctuations

Abstract

Behavioural economics is overlooked when talking about economics but it is a key part of our everyday lives. Cognitive biases are the foundation of behavioural economics and they dictate every decision we make. In this paper, I examine the role our inherent cognitive biases play in the fluctuation of traditional and cryptocurrency markets. I first lay the groundwork by establishing what behavioural economics is and explaining common biases as well as explaining what financial markets are in general. I then use the dot-com bubble as a case study to analyse the existence of these biases in a traditional market by comparing fluctuations during the dot-com bubble to the speculative bubble model. Following this, I introduce cryptocurrencies and analyse the cryptocurrency market over a time period and analyse trends to determine whether a bias exists. This is done using internet search data from Google Trends, as well as conducting a self-designed survey and a regression analysis of the resulting data. Results corroborate well with the existing literature and tentatively point to the existence of cognitive biases with regard to market fluctuations in both traditional and crypto assets. The alignment of my survey data with my research strengthens the premise that these biases not only exist but also contribute to the fluctuations of markets.

 

Downloads

Download data is not yet available.

Author Biography

Radu Gabriel Cristea, University of Cambridge

Advisor

References or Bibliography

AL-MANSOUR, Bashar Yaser. “Cryptocurrency Market: Behavioural Finance Perspective.” The Journal of Asian Finance, Economics and Business, vol. 7, no. 12, 2020, pp. 159–168., https://doi.org/10.13106/jafeb.2020.vol7.no12.159.

Boda, Jhansi Rani, and G. Sunitha. “INVESTOR’S PSYCHOLOGY IN INVESTMENT DECISION MAKING: A BEHAVIORAL FINANCE APPROACHJ.” International Journal of Pure and Applied Mathematics, vol. 119, no. No.7, ser. 1253-1261, 2018. 1253-1261, https://www.acadpubl.eu/jsi/2018-119-7/articles/7b/39.pdf.

Bouri et al. “Herding Behaviour in the Cryptocurrency Market.” University of Pretoria Department of Economics Working Paper Series, June 2018, https://www.up.ac.za/media/shared/61/WP/wp_2018_34.zp155160.pdf.

Boxer, Michael and Thompson, Nik, "Herd Behaviour in Cryptocurrency Markets" (2020). ACIS 2020 Proceedings. 42. https://aisel.aisnet.org/acis2020/42

Calderón, Obryan Poyser. “Herding Behavior in Cryptocurrency Market.” Universitat Autònoma De Barcelona Department of Applied Economics, Nov. 2018, https://arxiv.org/pdf/1806.11348.pdf.

Cheah, Eng-Tuck, and John Fry. “Speculative Bubbles in Bitcoin Markets? an Empirical Investigation into the Fundamental Value of Bitcoin.” Economics Letters, vol. 130, 2015, pp. 32–36., https://doi.org/10.1016/j.econlet.2015.02.029.

Christie, William G., and Roger D. Huang. “Following the Pied Piper: Do Individual Returns Herd around the Market?” Financial Analysts Journal, vol. 51, no. 4, 1995, pp. 31–37. JSTOR, http://www.jstor.org/stable/4479855. Accessed 10 Jul. 2022.

De Bondt, Werner F.M. “A Portrait of the Individual Investor.” European Economic Review, vol. 42, no. 3-5, 1998, pp. 831–844., https://doi.org/10.1016/s0014-2921(98)00009-9.

DeLong, J. Bradford, and Konstantin Magin. “A Short Note on the Size of the Dot-Com Bubble.” 2006, https://doi.org/10.3386/w12011.

Emambocus, Mohammad Abdul Washad, and Gurjeet Dhesi. “Bubble and Burst: A Psychoanalytic Perspective on Financial Instability.” Global Economy and Finance Journal, vol. 3, no. 2, 2010, pp. 165–175, https://d1wqtxts1xzle7.cloudfront.net/49456014/Bubble_and_Burst_A_Psychoanalytic_Perspe20161008-15286-1ojpx3e.pdf?1475947774=&response-content-disposition=inline%3B+filename%3DBubble_and_Burst_A_Psychoanalytic_Perspe.pdf&Expires=1626993141&Signature=a517yzG9ZyKs-NwtUpkwL3Yk3S7DoGJOYODQA6U7QUcrvJ8ifheSV0jKeWsD2c8kHYzSkva-SrSUvINBUSTMB~deiUznMBPHXLgIMRloJ8igabpCmLVcxcY5kKEoXJT1hcO3bIs65Nd5VHULDMsSTWj4bK5BJZKNqDspbi~ReX8f1VKb8W3vlEvJSBlIfzjjGNEDnCixokqklMboeDYEUlVG-pEwbtbwwhAzTmLER6O7TI~It-PGtAGoE0DLZ2BMqe4lebMcocRyidawcg7OZM60OAvY0I0KsZU1BsKD4EepvV5GR6IPfz2zTBN2MwJdAwEv09OSFesjJeqP03k5Rg__&Key-Pair-Id=APKAJLOHF5GGSLRBV4ZA.

“Extent of Elon Musk's Effect on Cryptocurrency; Where Is It Headed ?” Economic Times, 29 May 2021.

Fama, Eugene F. “Efficient Capital Markets: A Review of Theory and Empirical Work.” The Journal of Finance, vol. 25, no. 2, 1970, pp. 383–417. JSTOR, https://doi.org/10.2307/2325486. Accessed 10 Jul. 2022.

From “Economic Man” to Behavioral Economics - Stanford University. https://web.stanford.edu/~knutson/bad/fox15.pdf.

Garber, Peter M. “Famous First Bubbles.” Journal of Economic Perspectives, vol. 4, no. 2, 1990, pp. 35–54., https://doi.org/10.1257/jep.4.2.35.

GOTTWALD, RADIM. “THE DEPENDENCE BETWEEN STOCK PRICE AND INTRINSIC VALUE OF A STOCK .” JOURNAL OF INTERDISCIPLINARY RESEARCH, http://www.magnanimitas.cz/ADALTA/0101/papers/gottwald.pdf.

Govetto, Marco, and Thomas Walcher. “ANALYSIS AND INTERPRETATION OF THE U.S. MONETARY POLICY DURING THE DOT.COM BUBBLE AND THE SUBPRIME CRISIS.” Copenhagen Business School Master Thesis, Aug. 2009, https://researchapi.cbs.dk/ws/portalfiles/portal/58449218/marco_govetto_og_thomas_walcher.pdf.

Hayes, Adam. “What Factors Give Cryptocurrencies Their Value: An Empirical Analysis.” SSRN Electronic Journal, 2015, https://doi.org/10.2139/ssrn.2579445.

Hidajat, Taofik. “Behavioural Biases in Bitcoin Trading.” Fokus Ekonomi : Jurnal Ilmiah Ekonomi, vol. 14, no. 2, 2019, pp. 337–354., https://doi.org/10.34152/fe.14.2.337-354.

HOTAR, Nükhet. “Herd Behavior in Terms of Social Psychology: The Example of Crypto Asset Markets.” International Journal of EBusiness and EGovernment Studies, vol. 12, no. 1, 2020, pp. 79–90., https://doi.org/10.34111/ijebeg.202012106.

“Intrinsic Valuation.” Intrinsic vs Relative Value, http://people.stern.nyu.edu/adamodar/New_Home_Page/littlebook/intrinsicvsrelative.htm.

Jabotinsky, Hadar Y., and Roee Sarel. “How the Covid-19 Pandemic Affected the Cryptocurrency Market.” COLUMBIA LAW SCHOOL'S BLOG ON CORPORATIONS AND THE CAPITAL MARKETS, https://clsbluesky.law.columbia.edu/2021/03/26/how-the-covid-19-pandemic-affected-the-cryptocurrency-market/.

Jakhar, Mukesh Kumar. “A Study on Behavioural Finance in Financial Markets.” International Journal on Future Revolution in Computer Science & Communication Engineering , vol. 5, no. 2, http://www.ijfrcsce.org/index.ph p/ijfrcsce/article/view/1948/1944.

Kahneman, Daniel. Thinking, Fast and Slow. 2011.

Kapoor, Sujata, and Jaya M. Prosad. “Behavioural Finance: A Review.” Procedia Computer Science, vol. 122, 2017, pp. 50–54., https://doi.org/10.1016/j.procs.2017.11.340.

KINDLEBERGER, Charles Poor, and Peter L. BERNSTEIN. Manias, Panics, and Crashes: A History of Financial Crises. MACMILLAN, 1996.

Koehn, Maximilian-Benedikt, and Andrejs Cekuls. “A BEHAVIOURAL FINANCE EXPLANATION OF SPECULATIVE BUBBLES: EVIDENCE FROM THE BITCOIN PRICE DEVELOPMENT.” University of Latvia Faculty of Business, Management and Economics, http://dspace.lu.lv/dspace/bitstream/handle/7/54128/Koehn_M_B_Cekuls_A_NC_2019.pdf?sequence=1&isAllowed=y.

KONSTANTINIDIS, Anastasios, et al. “FROM EFFICIENT MARKET HYPOTHESIS TO BEHAVIOURAL FINANCE: CAN BEHAVIOURAL FINANCE BE THE NEW DOMINANT MODEL FOR INVESTING? .” Scientific Bulletin – Economic Sciences, vol. 11, no. 2, pp. 18–28, https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.475.8214&rep=rep1&type=pdf#page=18

Luther, William J. “Is Bitcoin Intrinsically Worthless?” SSRN Electronic Journal, 2017, https://doi.org/10.2139/ssrn.3000068.

Mai, Feng, et al. “From Bitcoin to Big Coin: The Impacts of Social Media on Bitcoin Performance.” SSRN Electronic Journal, 2015, https://doi.org/10.2139/ssrn.2545957.

Meynkhard, Artur. “Fair Market Value of Bitcoin: Halving Effect.” Investment Management and Financial Innovations, vol. 16, no. 4, 2019, pp. 72–85., https://doi.org/10.21511/imfi.16(4).2019.07.

Podhorsky, Andrea. “Bursting the Bitcoin Bubble: Assessing the Fundamental Value and Social Costs of Bitcoin.” SSRN Electronic Journal, 2019, https://doi.org/10.2139/ssrn.3358270.

Scherbina, Anna. “Asset Price Bubbles: A Selective Survey.” IMF Working Papers, vol. 13, no. 45, 2013, https://doi.org/10.5089/9781475515299.001.

Segal, Troy. “5 Stages of a Bubble.” Investopedia, Investopedia, 8 July 2022, https://www.investopedia.com/articles/stocks/10/5-steps-of-a-bubble.asp.

Sehgal, Sanjay, and Asheesh Pandey. “Equity Valuation Using Price Multiples: A Comparative Study for Bricks.” Asian Journal of Finance & Accounting, vol. 2, no. 1, 2010, https://doi.org/10.5296/ajfa.v2i1.283.

Stanley, Darrol J., and Michael D. Kinsman. “The Efficient Market Hypothesis, Price Multiples, and the German Stock Market.” International Business & Economics Research Journal, vol. 8, no. 1, 2011, https://doi.org/10.19030/iber.v8i1.3085.

Stavroyiannis, Stavros and Babalos, Vassilios, “Dynamic Properties of the Bitcoin and the US Market” 2017, http://dx.doi.org/10.2139/ssrn.2966998.

Steib, Ben. “‘The Robinhood Effect’ - Digital Technology in Global Financial Markets and Its Effects on Investor Decision Making.” Accessed 10 July 2022, https://digitalcommons.colby.edu/cgi/viewcontent.cgi?article=2338&context=honorstheses.

Team, The Investopedia. “Intrinsic Value.” Investopedia, Investopedia, 28 June 2022, https://www.investopedia.com/terms/i/intrinsicvalue.asp.

Whitefoot, John, and Moe Zulfiqar. “The Dotcom Bubble Crash Explained in a Timeline.” Lombardi Letter, 7 Sept. 2017, https://www.lombardiletter.com/the-dotcom-bubble-crash-a-timeline/9251/.

“Why Do We Take Mental Shortcuts?” The Decision Lab, https://thedecisionlab.com/biases/heuristics/.

Wilson, Richard C. “What Is Homo Economicus?” Investopedia, Investopedia, 19 May 2021, https://www.investopedia.com/ask/answers/08/homo-economicus.asp.

Published

08-31-2022

How to Cite

Sheth, N., & Gabriel Cristea, R. (2022). The Role of Cognitive Biases in the Fluctuation of Traditional and Modern Financial Markets. Journal of Student Research, 11(3). https://doi.org/10.47611/jsrhs.v11i3.3133

Issue

Section

HS Research Projects