Lesson 8 of 8 · All lessons in this module
- Cognitive errors versus emotional biasesVideo lesson
- Belief perseverance I: conservatism and confirmation
- Belief perseverance II: representativeness, illusion of control and hindsight
- Information-processing biases: anchoring, mental accounting, framing and availabilityVideo lesson
- Emotional biases I: loss aversion and overconfidenceVideo lesson
- Emotional biases II: self-control, status quo, endowment and regret aversion
- Integrated case: a multi-bias file with 'least likely' and 'not shown' items
- Behavioural finance and market anomalies
Lesson 8 of 8 · 14 min
Behavioural finance and market anomalies
When many investors share the same biases, prices can show persistent patterns that efficient-market theory struggles to explain, but before calling a pattern an anomaly, check that it is not a model, statistics or timing artefact.
In short
- An anomaly is an apparent deviation from market efficiency: persistent abnormal returns that are different from zero and predictable in direction.
- Not every deviation is an anomaly. Misclassification comes from the asset pricing model (the excess return may be compensation for risk), statistical issues (small samples, selection or survivorship bias, data mining, benchmark choice) and temporary disequilibria that fade once published.
- Momentum: recent winners keep winning for up to about two years, followed by reversal. Linked to availability (recency), hindsight and regret, and loss aversion.
- Bubbles and crashes: some rational explanations (limits to arbitrage, career risk); behaviourally, overconfidence (with confirmation and self-attribution) drives bubbles, regret aversion pulls people in, and anchoring and cognitive dissonance slow the unwinding until capitulation.
- Value effect: value stocks have outperformed growth stocks; the three-factor model reads this as risk compensation, behavioural finance as mispricing from the halo effect (representativeness), overconfidence and emotion, including home bias.
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