Overconfidence and Herd Effect in Behavioral Finance

Abstract

There are some puzzles in the securities market that are difficult to explain in traditional financial theory, such as excessive trading in the stock market, financial bubbles and crashes. The financial bubble is an important research content of behavioral finance. This paper first briefly combs many bubbles and crashes in the history of human finance, and analyzes the causes of bubbles. Then, from the perspective of behavioral finance, this paper discusses the influence that overconfidence and herd effect of investors on securities trading decisions and earnings. (1) Overconfidence leads to frequent trading of investors and loss of wealth; (2) China's stock investors exist The herd effect and this effect will increase the risk of stock price crashes. Finally, according to the significant overconfidence and herding effects among domestic investors, this paper lists some suggestions.