There have been a lot of papers and reviews written on the behavioral being applied to the financial markets of United States and other developed countries. This paper aims to apply the similar behavioral finance theories to the Chinese market and check whether the concept of the behavioral finance applies to the Chinese market.
There are many modern finance theories which have been taught in most of the B schools and other institutions to explain the functioning of market. These theories do not take into consideration the aspect of the human behavior in explaining the movement of the markets. These theories say that the investors would tend to behave in a manner which these theories want them to behave. These theories are then related to mathematical optimization problem and the explanation of the movements in market is explained through it. Theories like the price of an asset can be calculated using the sum of discounted cash flows. This problem can be solved using the mathematical equation. However this is not always correct and the mathematical model fails to take the investor’s perspective in the model calculations. Investors and other analysts use pure logical and quantitative mathematical models to come to a conclusion. However these models fail to take into account the behavioral aspect of the human nature and thus in times of crisis and good times the prices of the assets and market movements defy the logic of these mathematical models.