Stock Market Efficiency Vs Behavioral Finance

According to Investopedia, behavioral finance can be defined as a study of investor market behavior that derives from psychological principles of decision making and explain the human decision making in buying or selling the stocks. There are some errors that are always made by investors such as overconfidence, confirmation bias, conservatism and so on. Therefore, I believed that not all investor can think rationally when they are making decision in buying or selling stock.

Meanwhile, Stock Market Efficiency is known as the stock prices that will reflect on all available information in the market and the stock prices will only changes when there is new information enters to the market. So, there is no way that investors can make extra profits by doing analysis in the market because all available information is already reflecting into the stock prices. According to Fama (1970), there are 3 forms of market efficiency which are weak from, semi-strong and strong form.  But today, I will just talk about the semi-strong form and strong form efficiency. Is there any relationship between stock market efficiency and behavioral finance? In my point of view, I believe that every person will have a strong desire for more wealth that will cause us cannot make decision in a rational way. Therefore, investors will make decision if there is any news or rumours is spread in the market. This also explain that why there is no systematic link between one price movement and subsequent ones and share price changes when new news enter to the market.

Recently, I have just read this interesting news which talks about the United Continental (UAL) chief in hospital after heart attack from the BBC headlines one day ago. Oscar Munoz, the new CEO suffered from a heart attack on Thursday. After the news announced, the shares price of UAL fell from $57.89 to $55.97. It shows that there is semi-strong form efficiency because the share price had reacted quickly and rationally to the latest information from United Continental Airlines. After the announcement, some investors might react quickly to sell off the UAL that cause the price of shares dropped. According to Wall Street Journal, it reported that the company’s board still waiting to know the latest news from doctors and Munoz’s family about health condition of Mr. Munoz before making a decision on whether a permanent chief executive is needed or not. If this news is announced then will this cause the share price drop again?

Date	Open	High	Low	Close	Volume	Adj Close
16/10/2015	57.89	57.98	55.05	55.97	14537200	55.97
15/10/2015	57.79	58.08	56.72	57.76	4170200	57.76

For more information, please go to: http://finance.yahoo.com/echarts?s=UAL+Interactive#{"range":"5d","showPrePost":false,"didDisablePrePost":true,"allowChartStacking":true}