Behavioral finance is a relatively new but rapidly expanding field that combines behavioral and
cognitive psychological theory with traditional economics and finance to explain people's
economic behavior. Behavioral finance seeks to comprehend and explain real-world investor and
market behavior. Understanding and incorporating behavioral finance can help advisers and their
clients achieve better results in a variety of situations. According to Meir Statman, standard finance
discusses financial issues that are frequently muddled in real life by inaccurate and difficult
circumstances, whereas behavioral finance seeks to understand and learn from human
psychological processes at work in financial markets and among investors. Behavioral finance is
finance for everyday people like you and me. Standard finance, on the other hand, is finance with
rational people involved. There are two (2) types of behavioral finance. Micro to macro behavioral
finance. BFMI, or behavioral finance micro, investigates individual investor behaviors or biases
that distinguish them from the envisioned conventional economic theory of rational actors,
whereas BFMA, or behavioral finance macro, discovers and describes abnormalities in efficient
market theory that can be explained by behavioral models.
The efficient market hypothesis (EMH) or theory states that share prices reflect all information.
The EMH hypothesizes that stocks trade at their fair market value on exchanges. Proponents of
EMH posit that investors benefit from investing in a low-cost, passive portfolio. EMH, which
originated with Fama's PhD dissertation, has grown during the past decade. The EMH can manifest
itself in three ways: weak, semistrong, and strong. The weak form asserts that all previous market
prices and data are fully represented in securities prices, and technical analysis has little or no
relevance. Semi-strong form, on the other hand, claims that all publicly available information is
fully represented in stock prices, implying that fundamental analysis is pointless. The strong form,
on the other hand, asserts that all information is completely reflected in stock prices, implying that
insider information is meaningless. No amount of data or sophisticated analysis can be expected
to lead to outperformance against a chosen benchmark if a market is efficient. An efficient market
is one in which a large number of rational investors work together to maximize profits in the
direction of individual assets. To summarize, in an efficient market, the price of a security will
always be equal to its intrinsic value. Anomalies are a result of market failures. There are three (3)
main types of market anomalies; Fundamental anomalies, technical anomalies, calendar
anomalies. Fundamental anomalies appear when the performance of a stock is examined in light
of a fundamental appraisal of the stock's value. Fundamental anomalies include value anomalies
and the small cap effect, low price to book, high dividend yield, low price to sales (P/S), and low
price to earnings (P/E) (Karz 2011). Technical anomalies, on the other hand, are anomalies
discovered as a result of technical analysis interpretation. Technical analysis is used in this case to
counter three factors: security prices, the repeatability of market price trends, and the fact that
prices tend to enroll in some trends. Calendar anomalies, on the other hand, are essentially defined
as an erratic pattern of stock returns based on a calendar year. The purpose of this paper is to look
into the existence of calendar anomalies in the Indian stock market, specifically the Day of the
Week effect, the Turn of the Month effect, and the Month of the Year effect. There are also three
(3) fundamental assumptions; perfect rationality, perfect self-interest, and perfect information.
Perfect rationality has the ability to reason and make positive decisions when they are sensible.
Perfect self-interest, people who are not perfectly self-interested, according to numerous research.
Perfect information, has perfect or near-perfect knowledge of a subject.
In addition, anomalies are size effect, value effect, momentum effect, post-earnings announcement
drift, long-term reversal effect such as calendar effect as I mentioned a while ago. Through
announcements and anomalies, some are associated with the disclosure of information on stock
splits, earnings, and mergers and acquisitions. Apart from anomalies, there are several nonmarket
signs that some individuals believe can reliably predict market direction. A small selection of
superstitious market indicators follows: the super bowl, the hemline, and the aspirin.
Systematic biases, assist investors in making a more protective and appropriate decision for
themselves. Also, systematic biases aren't always the result of mistakes. There are 7 systematic
biases; Availability bias, Representativeness bias, Anchoring and Conservatism bias,
Overconfidence bias, Rational decision making under risk, mental accounting and familiarity. If it
has systematic biases there is also an emotional bias. Emotional biases are influenced by emotional
events. Some of emotional biases; loss-aversion bias, self-control bias, status quo bias, endowment
bias, and regret-aversion bias. On the other hand, psychological bias is the tendency to make
irrational decisions or actions. Some psychological bias; diversification bias, excessive trading,
disposition effect, and Framing. We will also encounter behaviors by the professional investors
and analysts. The preserver type of investors are those loss averse and deliberate in decision
making, while the follower type of investors are lack of interest in money and investment in
general, as well as a desire for guidance while making financial decisions. And the independent
type, engaged in the investment process and opinionated on investment research. Lastly, the
accumulators type, they are interested and engaged in wealth accumulation and confident in
investing ability. Stock market behavior is significant for a variety of reasons and for many market
stakeholders. EPP or Equity Premium Puzzle is a term that refers to equities historically
exceptional outperformance vs. treasury bills. Volatility puzzle is the current discounted value of
future returns, according to efficient market theory, that can be used to forecast asset values.
Bubbles is an economic cycle marked by a rapid rise in asset prices followed by a fall in value.
When it comes to a company's financing and investment decisions, sensible leaders are driven by
their faith in market efficiency. The inadequacy of classical anticipated utility maximization of
rational investors within the efficient market framework to explain many empirical findings has
fueled the expansion of behavioral finance research. Behavioral finance tries to explain these
contradictions using explanations based on individual and group human behavior.