Behavioral analysis of market inefficiencies

Abstract

We have looked at three research issues – 1) the difficulty in predicting the probability of failure 2) the desire to be in consensus with the broader view, and 3) the exaggeration of uptrends and downtrends. Based on our data-driven analysis of each issue, we find that these market inefficiencies are explained by various psychological tendencies and biases such as the halo effect, regret aversion, loss aversion, social proof, and bandwagon effect amongst others. One should remain cognizant of these biases while referring to analyst reports, company communications etc., as well as when investing in the stock market in order to facilitate objective decision making.